Life insurance deserves to be considered by every household, being one of the pillars of personal finance. Despite its applicability, however, a lot of people are still confused and even skeptic about the concept of life insurance.
It may all be due to its complexity, not to mention our slight annoyance to those who sell it. Preparing for demise can also be uncomfortable and is commonly a topic many people would want to avoid. But with the right information, life insurance can become a simple decision that you and your family can arrive on.
Life insurance is all about getting protection for life’s uncertainty. A consumer who is wise knows that the future is unpredictable. That said, it’s essential to come up with a solution and make sure that all your questions are answered before something happens.
About Life Insurance and How it Works
Life insurance is a contract between an insurer and an insurance policyholder. An insurer is required to make premium payments in exchange for a death benefit or lump-sum payment upon his or her death.
There are several types of life insurance, and the choice is based on the goals and needs of the insurer. Regardless of the type of life insurance, it’s important to note that the lump-sum payment will always be income-tax free.
Whole Life Insurance
Whole life insurance provides lifetime coverage. Due to its nature, whole life insurance normally has more expensive premium payments than all the other types. The payments are also fixed and have a cash value, which works as a savings component and rolls up over time tax-deferred.
A great benefit of whole life insurance is that it can work as a planning strategy to help save and store what you have to be given to your beneficiaries at the time of death.
Universal Life Insurance
Also a type of permanent life insurance, universal life insurance is designed to provide coverage for a lifetime as well. The only difference from whole life insurance is that it’s flexible and the premium payments can also be adjusted -- you can lower it or raise it. Like whole life, the premium payments for universal life insurance are also expensive.
Apart from providing death benefits, universal life insurance can also be used as income replacement once the retirement period arrives. It can help build cash value and it also works as a planning strategy to preserve assets to be given to beneficiaries.
Term Life Insurance
As the name implies, term life insurance offers financial protection for a specific period of time, let’s say a decade or two. The premium payments are non-adjustable, meaning you pay the same amount for the entire coverage period. Upon full payment, the policy offer may offer continued coverage but the rate for premium payments becomes higher. Among the three types of life insurance, term life is the most affordable.
Another way to use term life insurance is to replace the income once enjoyed during the working years. This ensures that your family will still have an income that can help them meet their goals, such as paying for tuition fees, business funding, or completing mortgage payments.
Take note, however, that the benefits are paid one time, and not in regular schedules the same as paychecks.
Questions and Answers
Here are some answers to common questions regarding life insurance:
Q: Do I really need to get life insurance?
A: Anyone who serves as the breadwinner of the family or has someone depend on him or her is a primary candidate for life insurance. This ensures that your beneficiaries are still covered. Individuals who have acquired debt in their lifetimes, such as student loans or mortgage, should also look into life insurance.
Q: What is a beneficiary?
A: A beneficiary is an individual or group of individuals who will receive the benefit. They are the ones listed on your policy. As the one who owns the policy, you can choose between one and five beneficiaries entitled to the lump-sum.
Q: What does a beneficiary need to do to receive the benefit?
A: Technically, nothing. However, it’s good to be informed that such a policy exists in case there are complications or delays of any kind. The insurer will also need a death certificate and a copy of the policy contract in order to deliver the benefit.
Q: When should I buy life insurance?
A: The best time to buy life insurance is as early as you can. The younger you are, the less you pay for the premiums. It’s also important to consider your needs. For example, starting a family may be the trigger or your go signal to get a life insurance.
Q: Are there exclusions?
A: Before signing the policy contract, make sure to read it over, paying specific attention to the exclusions and clauses. An exclusion is a cause of death that frees the insurance company of the responsibility from disbursing the benefit. The only common exclusion in most life insurance policies today is death by suicide.
Exclusions may be also based on your answers to the lifestyle and health questions given upon application. You will be advised by the insurer what these exclusions are.
