- Personal Finance»
Life Insurance: Basic Information and Advices
But do you actually know what is a “life insurance”? What are the pros and cons, the conditions and benefits? Let’s take a look through these simple information and advices and you will get the general picture.
First, the basics:
1. What is life insurance?
Life insurance is a commitment between the insurance company to the insured person in which insurance companies are responsible for paying a certain amount of insurance to the insured person relatives or the one appointed by the insured person (the beneficiary) when a predetermined event occurs , mostly death but sometime its also including permanent disability, critical illness, etc. The insured person is responsible for paying the insurance premium regularly or in one lump sum. There is usually 2 type of life insurance: Whole-life and term-life.
2. When do you need a life insurance?
If you have someone who relies upon you financially then you should purchase a life insurance. Here are some examples: Single parent, stay-at-home parent, married with kids, retired, etc. Sometime single persons also purchase life insurance mainly to support aging parents or relatives.
3. What is the similarity between a life insurance and normal bank saving
Technically these two are a bit similar yet quite different. A cash saving in the bank and the life insurance are both sending money to a place for possible later use but the striking different is that life insurance also eliminate the risk factor: what if something happen to you ?
After the contracts expire then the insurance company keep the premium and no longer pay you back when something happen to you. But you could also buy a whole-life insurance to cover your entire life. By buying the life insurance and paying the premium , even if something happen to you after you just a pay a small amount of money then it’s a guarantee that you or your beneficiaries will receive the full sum of you life insurance.
For an example: your life insurance has a sum of 1 million, your premium will be around 600$ a year or 50$ a month. Cheap eh? So if something happen to you after 2-3 months then the insurance company will pay back precisely 1 million.
Second, the advice:
4. How much life insurance I should buy and term life
Follow the policy “20-20”. Multiply your monthly salary by 20 and the period of your life insurance should be 20 years. This helps reduce the economic loss when you are not around or no longer able to work. The premium you have to pay for this term life will usually stable and wont increase. But you should put this into your own conditions. If you have many children, currently in dept, etc then you should multiply your monthly salary higher like 40 , 50 or 60 and adds up current loans or dept. You could also pick whole-life life insurance for good measure.
5. How to buy a life insurance policy
You can use a lot of ways to get yourself a good life insurance: Internet, newspapers, connections, etc. If you are having a hard time choosing, get yourself a broker. The broker will help and explain in detail about the pros and cons of each company policy, with a fee, and instruct you to buy the ones that fit your needs the most.
6. Should I buy other insurance as well?
Most life insurance only covers death so you might want to add some extra insurance just in case you are no longer able to work or facing critical illness. Ask the insurance company staff or broker to get more details on how to cover all of your worried scenarios.
And of course 1 final yet very important thing: READ very carefully the terms of the contract. Understand every words and lines. Have a question? Ask right away. This is your future we are talking about. Your signature has a great value so do not sign anything if you don’t know what it mean.