Events of the past year have brought a rude awakening about how fragile our lives are.
The pandemic forced many people to face the painful reckoning of death and the effect it can have on dependents. The course of many lives has been altered due to the death of providers and caregivers.
More people are now giving deep thought to the welfare of their dependents after they are gone. This has pushed some to consider taking out a life insurance policy to ensure that family members and loved ones are properly taken care of in the event of death.
In a survey conducted by Life Happens, an insurance group, more than 50% of respondents stated that the past year was the first time they discussed life insurance with a loved one. While taking out a life insurance policy seems uncomplicated, there are several factors worth considering.
Here are 4 crucial things you need to know before taking out a life insurance policy
1. Term length
The first factor to consider is the term length of the life insurance policy. Though this has implications for premium cost, you should also consider other factors such as retirement age, outstanding years for mortgage payment, etc. The key is having a term that is long enough to cover your obligations.
For example, if you have a house with a 15-year mortgage, it is advisable to have a policy with at least the same number of years (15) to cover mortgage payments if anything happens to you.
If you want your children to inherit your house, you can also factor in the years it would take for them to graduate from college in addition to the mortgage years.
It is also important that you clearly distinguish if you want a term life insurance or permanent life insurance. While a term life policy provides coverage for a certain period (e.g. 10 or 30 years), permanent life insurance provides lifelong coverage. Each type comes with its unique cost implications for the policyholder.
2. Coverage
Most people tend to underestimate how much coverage they would need on life insurance.
This is how much risk or liability the insurance company would cover for the individual, and for how long. During the application process, most people use the number of years they have left on the mortgage to calculate their coverage.
This is done without consideration of other important factors such as college tuition for kids or a partner’s retirement age.
To calculate the amount of coverage you would need, some experts recommend multiplying your annual salary by 10 to estimate. However, this discounts the effects of factors such as income bracket or inflation on the value of your coverage.
To have a more realistic picture of how much coverage you would need, you can add up all your debts and expenses (such as a mortgage, college tuition for kids), and subtract this amount from the cash available (cash flow from assets, existing insurance, savings, etc.).
The difference gives you an estimate of how much coverage you would need. If you don’t want to do this manually, you can use a life insurance calculator to get a more precise figure.
3. Age and health
Age and health status are two critical factors that life insurance companies use to determine the rate you pay for coverage.
Younger people are viewed as less risky because it is presumed that they are healthier and have a lot of years ahead of them. As such their policy comes cheaper than those who are elderly or have a health situation.
4. Going market rate.
Taking out a life insurance policy is a huge financial commitment. As such, you should endeavor to get the best deal in the market.
Since rates vary, get quotes from different companies to have a good idea of the going market rate and who can offer you the best deal. There are several insurance marketplaces online that provide quotes from several companies. Alternatively, you can get one from a qualified life insurance agent.
When comparing quotes, it is important that you do not focus solely on price. For example, if you want a termed life insurance, you can consider it comes with the option to convert to permanent life insurance.
Another factor to consider is the insurance company’s financial standing. You should go for an insurance company with a strong financial rating as this gives you a guarantee that claims won’t be delayed. Companies with an A rating from independent agencies are a good option.
Final word
Taking out life insurance is a responsible thing to do to protect the welfare of your dependents when you are gone.
However, beneath this simple decision lies layers of hidden costs and features that may increase the costs of premium for you. Try to find out as much as possible about the policy before committing yourself. Clarify the needs of your particular situation and ask as many questions as you can when in doubt.
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