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Life Insurance

We live in a world that is full of dangers and uncertainties. Every day one comes across so many videos on the internet showing how people luckily escape accidents, well you can be lucky ones, twice or even thrice but not all the time. This is why one needs to have a backup or a fallback plan. This becomes even more important when you consider the financial cost for the loved ones left behind in case of any life-threatening accident.

Life insurance is a way to be prudent for the future by taking out an insurance policy that provides financial coverage in case of untimely death.

What is Life Insurance?

Life insurance is an insurance agreement or a contract that is signed between the insurance provider and the insurance holder or policy taker. The purpose of life insurance agreement is to provide financial cover to the family or in particular the beneficiary of the policy taker if the policy taker dies during the term of the insurance policy.

The life insurance policy provides financial coverage to the beneficiaries of the policy taker and in return, the policy taker has to pay the insurance premium on a monthly basis in order to keep the policy active.

There are many different types of life insurance policies but they can all be grouped into two broad categories namely

Term life insurance policy
Permanent life insurance policy

Term Life Insurance

The term life insurance policy refers to any insurance policy that is time-barred. Most term insurance policies are limited by a term period of 10, 20 or 30 years. This is also known as the maturity period for the policy. After this period the policy terminates or has to be renewed. The coverage is only provided for the maturity period. Which means that if the policy taker passes away during the term of the policy, then their beneficiaries will receive the death benefits and if the policy taker passes away after the maturity period and the policy was not renewed, then there will be no death benefit for the beneficiaries.

Permanent Life Insurance

Permanent life insurance policies last the entire lifetime of the policyholder. They are not time-barred and continue as long as the policy taker keeps on paying the insurance premium on time. Because permanent life insurance continues till the death of the policyholder, it has a higher premium and carries more benefits as compared to term life insurance policies.

Other types of insurance policies

Some of the other insurance policies that can be grouped under the two categories mentioned above are as follows

Level term policy: Carries uniform premiums
Increasing term policy: Premium increases every year.
Single-Premium: Entire premium paid upfront
Universal Insurance: Similar to permanent life insurance
Guaranteed issue: Policy for individuals with certain medical conditions that are not otherwise insurable.

Components of Life Insurance

Life insurance policies carry the following components.

Premium: The premium is the cost of the insurance policy which is paid in monthly, quarterly, semi-annually or annually. Mostly it is paid monthly as this is more affordable for most policy makers.
Death Benefits: Death benefits are the benefits that the beneficiaries of the policy taker receive in case of death of the policy taker during the term of the insurance policy.
Cash Value: Cash value is a component of a permanent life insurance policy, it is not present in term life insurance. The cash value can be considered as a saving account for permanent life insurance holders, the value of this account accumulates and builds up year after year and it can build up so much that the policyholder can use it to fund or finance personal expenditures. It must be remembered that the cash value can only be used as long as the policyholder is alive, upon death the cash value is transferred to the insurance agency.

Am I too old to get life insurance?

The best age for getting life insurance policy varies from a case to case basis but in general, a good time to get life insurance is when you are about to start a family or in your mid to late twenties. Why? Let us see.

Most young people, in their early or mid-20s, think why do we need to get life insurance? We are young and healthy, we do not need life insurance. Well, this is true but health is not something that we can take for granted, in particular during the current Covid-19 pandemic we have all seen just how precious and at the same time how fragile good health is. One day you can be healthy and the next you can be on life support.

Getting life insurance when you are young, healthy and possibly without long term commitments can be a good choice because at this age the insurance companies will attach a low-risk profile to you and therefore offer a lower premium to you.

If on the other hand, you decide to take your insurance policy in your mid to late 30s, by that time you may be healthy or you may have some underlying condition. Even if you are perfectly healthy the insurance companies will associate a higher risk profile with you because of your advanced age. It may sound grim but every year that passes, takes us all closer to death and from an insurance company`s point of view this means that the likelihood of paying death benefits will be higher for a person getting a 30-year policy at the age of 39 as compared to someone getting 30-year life insurance at the age of 20.

This is also another reason why permanent life insurance policies carry a higher insurance premium because no matter when you take it out, the insurance company knows that in future it will have to pay the death benefits.

On the other hand, if you take out life insurance in your 20s, then you may get a lower premium but you will have to pay that premium. As compared to someone who takes out an insurance policy at the age of 40, yes they will have to pay a higher premium but they have also saved up on 20 years of not paying the premium. So basically it all evens out.

So what else can we consider to answer this question? Well, the main reason why people take out an insurance policy is not the premium but the death benefits that the beneficiaries receive. So this in reality is what you should be looking at.

You should consider how long will your dependents for instance your partner or children will be dependent on you? If you take out 30-year life insurance before the birth of your first born then this means that the policy will last long after your children will be able to earn.

Take your time…

There is no need to rush. Life insurance is something that you can deliberate over, maybe talk to your partner or friends for advice. You should also consider your budget before making the final decision.

If you are in your mid-20s then you will have your mortgage and auto loan to pay off as well probably on top of student debt. See whether or not you can afford the premiums. If not then perhaps you can wait till you pay off some of the other loans.