As a beginner, you may hear the following bits of advice:
i) Everyone should have life insurance
ii) Life insurance is a waste of money
You may be confused with conflicting bits of information about insurance. To reduce the confusion, it is important to be in a position to judge for yourself instead of relying on the opinions and views of so-called experts.
As a beginner, you need to grasp the concept of life insurance plans before examining individual plans offered by insurers. However, you do not need to intimately study life insurance for months. It is important to have a working knowledge of why you need insurance, how much coverage you need and what types of life plans are available to you.
Why you need life insurance
There exists the belief that everyone needs life insurance. This is not always the case. However, because of uncertainty about the future, life insurance is generally a useful financial product to have.
Life insurance is a protection product that is critical in estate planning, mortgage protection and family income protection. Sometimes, the need for life insurance as collateral or for business purposes is often overlooked. The utility of a life insurance outside of family income protection is what makes it a must-have product for many people.
How much coverage you need
Once you decide that life insurance is necessary, it is important that you acquire sufficient coverage. Balance is the key. You must remember that you have other protection and accumulation products to cover. At the same time, purchasing an inadequate amount of insurance is risky. This is because you may not be able to purchase more coverage later when it is required.
Getting the right amount of coverage now is important. How much do you need though? Five or ten times your annual income? If you are buying life insurance for a specific need, like mortgage protection- this is hardly an issue. You just need to buy the amount that will cover the mortgage or loan.
Once you are using life insurance for family income protection, estimating coverage is a bit tricky. It is a half-truth that you must use your income in determining your life insurance coverage need. It is better to use an estimation of living expenses in determining life insurance needs.
More complex life insurance calculations will factor both income and expenses using proportional ratios. The good news is that you need not be adept at mathematics to estimate your life insurance coverage amount. There are several online life insurance calculators and templates available that are free of charge. A good equation to keep in mind is: Total coverage = Immediate Cash Needs + Income Shortfall + Income replacement Coverage available.
Types of life insurance available
It is easy to get confused when you are given too many options. Those who have too many options before making a purchasing decision may be likelier to experience buyer’s remorse. By having an idea of the types of life insurance plans available, you can actually reduce the plans that you seriously consider purchasing.
Temporary life insurance
This form of life insurance exists for a defined period or up to a specific age. If you just want life insurance for a specific need that does not have a time span of more than 20 years, you should use term life insurance plans or endowment plans.
Term plans include convertible term insurance, level term plans and refundable term insurance. These plans are a lot cheaper because they cover shorter periods. They also bear no cash values. This characteristic makes it easier for term insurance plans to lapse.
Permanent Life insurance
This group could be sub-divided into whole life plans and universal life plans. These plans can remain in force for your lifetime or up to age 100. They bear cash values that accumulate at rates dependent on the plan structure. The premium for these types of plans is typically much higher than term plans. Permanent insurance plans also have withdrawal options or loan facilities based on the accumulated cash value.
Remember is that you can have multiple plans to suit your varying needs. Let’s assume that you need both mortgage and family protection. You can purchase a term plan to cover your mortgage and permanent life insurance for family protection. The better informed you are, the easier your choice will be.