Choosing a life insurance policy can seem difficult as it makes us think about the effect of our demise on our loved ones. Here are some basics to help you choose the right policy.
What is life insurance?
Life insurance is a contract between the policyholder and the insurance company—the company guarantees to provide the person(s) listed by the policyholder (beneficiary) with a specific amount of money (death benefit) if the policyholder passes away. The policyholder pays the company a premium in return. The cost of the policy depends on your age and health—the younger and healthier you are, the less expensive the policy is.
Life insurance covers funeral expenses, student debt, and other debts so that your family doesn’t have to bear the burden of clearing them. It also allows you to leave an inheritance for your loved ones, so they can continue having the lifestyle they were used to before your death.
Types of life insurance policies
Term life insurance and permanent life insurance are the two main categories of life insurance. Term life insurance lasts for a specific term (usually 10-30 years), is the least expensive option, and has no cash value. Permanent life insurance is further divided into several categories, two of which are whole life insurance and universal life insurance. The former has a defined premium and lasts for as long as you pay the premiums. The latter offers investment options, and the premiums can be modified based on how you manage your cash values, investments, loans taken from the life insurance policy, and other such options.
Combination life insurance or convertible life insurance?
The former gives you the option of having a payout in circumstances apart from death. Convertible life insurance allows you to start with a term life insurance policy and later convert it into a whole life insurance policy before the term ends.
How much life insurance do you need?
To determine the amount, think about why you are buying the policy. For how long would you need to provide the income? If you have a partner, would they work after your death? Do you need to provide funds for education? What debts do you (or your family) have? What would be the funeral expenses? Consider factors such as these to finalize the coverage you would need.
