When you are a life insurance policy holder, it means there is a contract between you and a life insurance company.
The agreement terms name the policy holder as the insured and names the insuring company as the insurer.
The agreement then, is that the insured will be paying a certain amount of money on regular basis to the insurer.
The payment timelines are also captured in the contract, as well as the agreed amounts.
In the contract, the insurer agrees to pay a sum of cash to the insured after an agreed time, or to the policy beneficiaries of the insured, in case the insured dies.
The life insurance is a critical financial decision, and it comes in handy to help you and your loved ones.
If you are still alive when the contract term attains its maturity, it means you will get back your refunds, and no taxes will apply to that refund.
The refunds are termed as a premium refund, and not an income, and that is why tax is not factored in.
When the term matures, and the insured is still alive, the insurer gives back the premium cash to the insured person.
Most of the insuring companies will give benefits that come with the premium refunds.
Such benefits will range from bonus packages, interests, among others. Its advisable to check that detail with the insurer.
In case the insured person dies before the term life gets to maturity, the beneficiaries can then use the refunds to cater for expenses which can range from school fees, to mortgages, or pay off outstanding loans.
The contract is a binding agreement and is a step that one needs to think through critically before committing to it.
There are several things to consider, and that is what we are here for- to guide you through the critical decision:
- The period you need coverage
Life insurance is structured such that it can cover a specified period, which is termed as term life.
It can also cover the whole lifetime, which is called permanent coverage.
You will need to decide on what you want before you can commit to any policy.
The best way to decide on which term will work for you, is what need you want the policy for.
If you want the policy to cover you for a certain duration, for example when the kids are growing, or when you are paying off a mortgage, then consider the term life contract.
If you need it to act as an income replacement say for your spouse when you die, or you would want it to cover for stuff such as burial expenses, the policy that would serve you is a permanent coverage.
- A calculation of how much life insurance you desire
It is important to calculate the costs the policy will help you to leave behind.
One way to determine this is to use the DIME method.
This is how:
D- Debt: Just in case you were no more tomorrow, how much debt would you leave behind?
This is what the life insurance policy should cover.
Otherwise all the debts you leave behind will be passed over to your family, which would inconvenience them in many ways.
The debt figure should also cover the funeral expenses.
I- Income Replacement: You should consider a life policy that will offer sufficient income for your family when you die, to help them maintain their standard of living.
Get a policy that helps cover the income of your family to the point your youngest child turns 18.
For example, if your youngest child has 10 years more to go before that, calculate your yearly income by 10. Get a policy worth that much.
M- Mortgage: If you have mortgage costs you are still paying off, you should include the remaining balance of that loan.
If say for example the remaining mortgage balance is $150,000, add that figure to your debt and the income.
E- Education: Are you intending to cover for your children’s schooling expenses, and to what level?
Do you want the policy to cover for their childcare as well?
Are you planning to have them go through the university as you fund them?
Those are the questions that will guide you to make the decision on what the policy will cover.
If you intend them to go through a state school for their university education, then work with a figure of a minimum $100,000 per child for the four years.
If the children will go through private schools, that will need you to budget for a lot more.
Student loans and financial funding comes in handy, but it may not be a guarantee that the children will get that.
Plus, the loans can come up with crazy interest rates.
- Other objectives you want the policy to help achieve
Consider what you want the life policy to achieve for you.
There are some life insurance policies that you can use as savings.
The lifelong insurance covers have a cash value which increases over the years.
The permanent policy will also cover a death or face amount benefit.
This is the cash payable when the insured dies.
Then there is the cash value benefit that keeps growing over the years and it does not attract any tax expenses.
It is considered as tuition or a plan for accumulating retirement savings.
Some policies will allow you to benefit from that growing cash value while you are still alive, and you may therefore need to know different ways the life insurance cash value can benefit you.
- Naming your beneficiary
The person termed as the beneficiary is the one you allow to receive the policy proceedings once you are gone.
You need to name that person and there are many things to consider as you name the policy beneficiary.
Do not name a minor or a child, since they will not be able to receive funds.
Consider the many options besides your spouse and children.
Do you want to name one person, a group of people and if it is a group, how do you want the resources to be split?
Do you have a trustee or an established trust? Name them in the policy.
Do you want to name a charity or a non-profit organization? Or is it your estate? You need to put that in the policy.
As you name the beneficiary, factor in what your state allows and who it restricts from being named.
Your policy needs to be legally binding. You can consult a local insurance agent; just ensure they are licensed.
- Get a trusted advisor
As you take this important step, you need to consult with life insurance policy experts.
However, get someone who is not only licensed, but one you can trust that they have your best interest at heart.
Get all the legal advice and make the best out of this decision.