Getting life insurance for your family can be tricky, especially because you have to consider not only your needs but those of your loved ones. Even worse, some people still don’t understand how life insurance works. Perhaps you have your questions about life insurance, or someone recently suggested that you should buy one for you and your family and you have no clue about what it entails.
If you are considering buying a life insurance policy, then you should at least know how it works and how to find the best plan for your family. The last thing you want is to feel like you are wasting your money on a life insurance policy that you will never need when the truth is that you actually need it.
How it Works
First, you need to know what life insurance is. Life insurance is an agreement that requires the policyholder to make premium payments to the insurance for a certain amount of coverage meant to be paid out to beneficiaries as death benefits once the insured individual dies.
These are the fees paid to keep the policy in force. The premiums are usually made monthly or annually and are paid by the policyholder to the insurance company. Defaulting premium payments may lead to the termination of the policy by the insurance company. Premium amount varies depending on the type of plan and other factors like the health condition of the insured individual, their age, their occupation, and so on.
The policyholder is the owner of the insurance policy. This individual is responsible for paying the insurance premiums and has control over the policy in terms of choosing and changing the beneficiary. They can also access the cash value and while they own the policy, they also don’t have to be the insured ones, but in most cases they are.
The insured individual is the one covered by the policy. Unlike the policyholder, the insured has no control over the insurance policy, unless they are also the owner. However, the policy cannot pay out the benefits unless the insured passes away.
This is the insurance company providing the insurance policy plan. It is responsible for writing the insurance contract and paying out the death benefits of the policy to the listed beneficiary once the insured person dies.
This is the amount paid out to the beneficiary(s) after the insured person dies. The amount of death benefit is usually determined by the amount of coverage that was initially purchased.
This is the person or people that receive the death benefit from the insurance company after the demise of the insured.
Choosing the Right Plan
The right kind of plan boils down to the needs of your family. For instance, you and your spouse might not have kids at the time of purchasing life insurance but may have plans to get them in the future. You should consider this when taking out a life insurance policy.
Also, your kids might be toddlers at the time of the purchase, and this means that your needs in the future will increase considering that they will need school fees, upkeep money and other expenses paid for. In this case, you can also consider purchasing a child life insurance plan for your kid.
Does your spouse fully depend on your income? If so, then your insurance policy should be big enough to cater for all their needs when you die.
Another factor that will influence the type of plan you choose is if there is a disabled person in your family. Note that, if the disabled person requires financial aid for the rest of their lives, then the more coverage you will require.
Other people choose to take out a life insurance policy just to leave a legacy for their loved ones. If that is your case, then you will only require to purchase a plan depending on how much legacy you want to leave your loved ones with.
The easiest way to choose the right plan is to first establish what your reason is, then make a decision from there.
Types of Life Insurance
When choosing life insurance for your family, you will have two major types to choose from, the term life or a permanent option. Below is an explanation of the two main types of life insurance.
Permanent Life Insurance
Permanent life insurance provides protection for as long as the insured lives. So, whether they die at 40 years or at 95 years, their life insurance policy provides protection for them. As such, most life insurance policy plans tend to be costly.
One of the major differences between permanent life insurance and term life insurance is the cash value component. With permanent life insurance policies, there is an additional component, apart from the death benefit known as the cash value. Part of the premiums are set aside as the cash value component that the policyholder can borrow against or use in the future when the policy grows.
Term Life Insurance
A term life insurance policy is a temporary option that provides coverage for up to 30 years. For instance, you may decide to purchase a term life policy for 5 years, 10 years, 15 years, and so on. The death benefit pays out when the insured dies before the term period, and when they outlive their insurance term, the policy expires.
When this happens, you can buy a new term life policy, or convert the current one into a permanent life insurance policy. However, this only applies if you still need coverage otherwise if you no longer need an insurance policy you can let it expire.
Don’t just choose an insurance policy because it exists. Look into the needs of your family now and in the future then decide what policy will provide enough coverage. Whether you need a term life policy or permanent life insurance, shop around to get the best products at the best prices.