One of the truest statements about life is that it can be very unpredictable, and the best you can do to protect yourself and your loved ones is to be ready for the worst. While you can’t control every aspect of life, you sure can insure your financial situation with the right life insurance policy for yourself and your loved ones.
On the same note, in order to reap the maximum and essentially the right benefits, you must buy the right policy. However, choosing the right life insurance policy can be tricky, considering there are numerous different kinds of policies for each situation.
Now, since the first step towards doing anything right is to understand the basics, here is a nifty list of things you need to know before buying life insurance:
Review your financial situation and coverage needs
There is no one who can judge your financial situation and thus, your insurance needs better than you. So, unless you do not have enough time in hand or are absolutely clueless, try to make it a point to take as less outside help as you can for your financial matters and decisions.
In fact, contrary to the popular belief, evaluating your insurance needs is not as hard. You can easily get a rough idea of the insurance amount you should buy by simply adding up your annual income, an amount of debt and any additional costs you or your family might need to take care of in emergencies or in your absence.
To make the process even easier and faster, simply apply this formula: “Insurance amount to be invested in = Your annual income multiplied by X.” Here, ‘X’ can be any number between 5 and 10, depending upon your overall financial situation, like, your part in the family income, college fund for kids, any debts in your name, the amount you can afford to pay towards insurance every month etc.
Remember, the goal is to cover yours and your family’s financial needs in case any emergency strikes, without disrupting your present financial situation.
Understand the different kinds of insurance policies
A sense of understanding about different kinds of policies can help you make an informed decision about your life insurance needs. Nowadays, there are 2 basic types of life insurance: Term and Permanent.
The term insurance generally helps cover your immediate financial needs and has lower premiums. For instance, you can cover up most of your debt over the estimated period of time but do not have any additional cash value usable in the future.
On the other hand, the permanent life insurance provides better cash value but typically include installments for a longer period of time alongside higher premiums.
Now, each insurance type serves its purpose and can be beneficial or detrimental depending on your needs. Most insurance agents try to wrap you around the ‘what ifs’ and sell you ‘the most profitable policy’ for ‘them’. So, sit down with the agents and thoroughly understand the differences, pros, and cons of each policy. Then, make your choice after weighing in both ‘your’ present and future needs besides what you can afford.
Ask about the renewal policies
Most term insurances are renewable, thereby providing you a safety net to expand and/or change your policy with your changing situation. So, you can renew your insurance for one, two or more terms as you go. However, every term insurance has a different kind of renewal policy: some may have higher premiums while some may have renewal limits. For instance, you may be required to pay a higher premium for each renewal or there may be a certain age limit till you can renew your policy. Make sure you understand the renewal policy of your insurance before buying it.
Acknowledge that life insurance is not an investment
Many people buy life insurance to reap cash value. While the permanent policies do provide cash value along with the basic protection for emergencies, they should not be bought as an investment plan. Why buy an insurance plan and pay higher premiums just to have a saving component? There are the savings account for that purpose, use them!
Take your time to make the decision
Important decisions should never be rushed. Having said that, no matter how confident you feel about your knowledge regarding life insurance; never make the decision immediately after your first meeting with the agent. Go home, let the knowledge sink in, research some more, re-analyze your situation and then make a decision.
Leverage the 30-day trial period
Not many people know it but most insurance policies include a 30-day grace period. This essentially means that you can use this time to thoroughly understand the nitty-gritty of the policy you are interested in. If you are satisfied with the policy, you can officially buy it and continue paying the premium, and if not, you can simply cancel the deal and get your premium back.