1. The first thing you need to remember is why you need to buy life insurance. Failure to understand this crucial first issue can result in costly mistake.
Buying insurance to replace your income if you die or disabled in anyway so that people who are dependent on you financially do not have to suffer until they can fend for themselves.
2. Life insurance is not a substitute for retirement plans, or even investment plans because of the high cost of buying investment-laced life insurance policies.
Now, if you intend to build wealth through investments, there are options that are more cost-effective.
Since pay-outs for life insurance are tax free, you can use them to pay for estate taxes if you're passing on a sizable inheritance especially real property.
Who needs Life Insurance?
Anyone who is earning money and the people around him who is dependent on that income needs insurance.
That means, you don't have enough wealth set aside yet for their needs in case you die today.
1. Parents with children, especially young ones
2. Parents with financially dependent spouses.
3. Breadwinners who are supporting aging parents or young siblings
Anybody who is single and does not have any dependent, does not need insurance, unless for estate tax planning purposes.
What kind of insurance policy should you buy?
There are several types out there.
1. Term Life Insurance
it's a temporary and cheapest insurance. It covers you for only a specific period like 1 year, 5 years or 10 years. That's renewable. It pays the phase amount only when you die. It's none of the bells and whistles that other insurance policies have. There are no cash values. No investments. But it may have some riders like Accidental Death and Waiver Premium if you're disabled.
Most of the people who need insurance the most can only afford term.
2. Permanent Life Insurance
The other kind of insurance is permanent life insurance in which the name implies, insures you until the end of your life. A prominent life insurance accumulate cash value which policy owners can borrow from the cash value at a certain interest when they need cash.
There are different kinds of Permanent Life Insurance:
- Variable Life Insurance - the most common sold now in the market. These are essentially term insurance married with mutual funds with higher commission fees that the agent tacked on the product.
- Are not in debt
- Can afford to invest but do not have the time or inclination to do it on their own.
- Need to be forced to save.
How much coverage do you need?
Buying insufficient life cover is like going to the dentist to get a cleaning when you need a root canal. You just shouldn't do it.
A quick way of figuring out how much life cover you need is to compute how much money your dependents need to sustain a reasonable lifestyle until they can fend for themselves.
Do not use life insurance to keep your family comfortable for life. One, you'll be saddled with so much premium cost; and two, they will get lazy. Not a good idea.
Now remember this, your agent if she or he is not the enlightener or responsible one will surely discourage you to buy term life insurance. They are trained to push permanent life insurance.
What to do when your agent pushes you to buy the policy he is selling?
What you do is to prioritize the amount of life cover in need. If you have to bring it down, so you can meet premium payments of the (VUL) Variable Universal Insurance, then stop. Go for term insurance.
What's the most important part of getting an insurance?
The most important part of getting insurance is making sure your income is sufficiently replaced if in case anything happens to you. That's the reason why you're buying insurance in the first place.
When you're done choosing, your agent will give you an offer sheet. She or he must disclose everything to you.
If there's anything you don't understand in the contract, please let me repeat it, then, don't be shy to ask questions.
The 13 Most Important Things That You Should Know When Buying Life Insurance
1. How much will your family get if you die?
2. How much will your family get if you die through an accident?
3. How much will your family get if you are disable or dismembered?
4. How much will you pay every month?
5. How often will the policy be renewed if it's a term insurance?
6. Where do you pay?
7. How long is the grace period for paying?
8. Where will the investment component go if it's a Variable Universal Life (VUL) insurance?
9. How much is the commission of the agent and what is the schedule of payment?
10. When will the policy begin putting your money in investments?
11. How much in the interest if you borrow from your cash value?
12. If there are regular cash payouts, when will it be paid and how will you get the payment?
13. Who do you call if there is a problem?
I hope that will down many of the concepts that were hard to understand, so that buying insurance wouldn't be so difficult anymore.
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