Things You Should Know Before Buying Life Insurance

By MicaR | Online Venture | 9 Jun 2024


This short article tries to answer some common questions regarding insurance, and life insurance in general.

Short Term Insurance vs. Long Term Insurance Policy

Based on the maturity period of insurance policy, insurance can be broadly divided into two types: Short Term Insurance Policy and Long Term Insurance Policy.

What is Short Term Insurance Policy?

Short Term Insurance Policy is a policy that has a maturity period of 1 year. Normally, Short Term Insurance Policy covers the areas such as health insurance, auto insurance, business insurance, house insurance, etc. You will have to renew the policy every year. If nothing happens during the insured period, you do not get any benefits.

What is Long Term Insurance Policy?

Long Term Insurance Policy is a policy that has a maturity period of 5 years, 10 years, 15 years, even 20 years. Generally speaking, Long Term Insurance Policy covers life insurance. You will have to pay the premium annually until the maturity period and then get the benefits.

Life Insurance vs. Non-Life Insurance

Insurance can be broadly categorized into two types: Life Insurance and Non-Life Insurance.

What is Life Insurance?

A life insurance policy is a policy that covers health insurance as well as life insurance. The maturity period can be for a short term as well as a long term. Health insurance takes of your medical bills whereas life insurance covers accidents, terminal illness, and loss of organs.

What is Non-Life Insurance?

Non-life insurance policy is a policy that covers the areas like auto insurance, house insurance, business insurance, etc. Non-life insurance generally is for short time. Non-life insurance will cover the loss or damage against your insured property. Let's say, you have insured your car and your car is damaged in an accident. Your insurance company assesses the damages and provides benefits accordingly. However, if your insured property is not damaged during the insured period, you do not get any benefits.

Insurance Vs. Assurance: What’s the Difference?

 A lot of people confuse insurance with assurance. Let’s look at the similarities between insurance and assurance and the difference between assurance and insurance.

Insurance and assurance are similar in the sense that they both provide coverage against loss and damages or any hazards. The major difference between insurance and assurance is the term period. While insurance covers the damages and loss for a certain time, assurance covers over an extended period of time. For example, you buy a life assurance for the term of 20 years, your policy will give coverage only for 20 years and upon maturity, you can collect the benefits. However, an assurance policy will give coverage for the entire life and will give benefits to your nominee after your death.

Generally speaking, an insurance policy is for you, an assurance policy is for your family (kids or spouse).

Reasons Why You Need a Life Insurance?

Life is uncertain, anything can happen at any moment. You are trying to cross a street, a car hits you and you lose your leg. Here lies the importance of getting life insurance. While life insurance cannot give back your legs, it will surely cover the loss in terms of money. This is the most obvious reason for getting life insurance, however, there are many other reasons why you need life insurance.

After the maturity period, you get your insured amount along with a bonus. The money will help you in old age.

In case of death, during the insured period, your premium will be waived off and your nominee can get the benefits.

If you want money immediately but have no other source, you can get a loan by using your insurance policy as collateral.

Life Insurance Term: 5 Years 10, Years, or 20 Years?

A life insurance policy is an insurance policy that covers terminal illness, loss of organs due to accidents, and also death. If nothing happens during the insurance tenure, you will get your insured amount along with a bonus. You can get a life insurance policy for the term of 5 years, 10 years, or even 25 years. But this also means you are paying premiums for the entire term, which might be financially daunting if you have a limited income. By the way, how do you decide the term for your life insurance policy?

When I was buying a life insurance policy, I wanted to choose 15 years term. However, for the amount that I wanted to insure, I did not have enough money to pay for my first premium. If I chose 20 years period, the money I had at that time would be just enough to pay for my first insurance. Therefore, I chose 20 years term.

Benefits of Buying Life Insurance Policy

If you have not bought life insurance already, here are some of the benefits of buying life insurance for yourself and your family members. You can use life insurance as:

  • Saving scheme

  • Retirement benefits

  • Get a loan,

  • Fund your child's education, etc.

Buying Life Insurance Policy as a Saving Scheme

Generally speaking, people buy life insurance policy to cover loss and damages. However, not many people realize that life insurance policy is also a way to save money.

For many people, regular saving is simply not possible because they are not earning much and they have high expenses. However, if the same person buys life insurance policy, he will have to pay premiums regularly. If he does pay the premium, his policy will lapse and he will be losing a lot of money (premiums he had paid previously). Therefore, in order to avoid lapse of the policy, the insured person will continuously pay the premiums until maturity.

Let say you pay $100 as premium. It might not be possible for you to save $100 regularly, but you will surely pay $100 premium. By paying premium, you are also regularly saving money and upon maturity you will get everything you have paid plus the bonus according to the insurance term.

How to Use Life Insurance As Your Retirement Benefits

If you are a freelancer or if you are working in a small firm, it is almost certain that you will not have any retirement benefits. In order to get retirement benefits, you either need to work for the government agencies or big companies. Therefore, for a lot of people retirement benefits is not an option. Here lies the importance of buying life insurance policy that you can ultimately use as retirement benefits.

Now, you might ask, how to use life insurance as your retirement benefits. I will exemplify with my case.

I have bought life insurance policy with the term of 20 years. I am a freelancer, therefore, I do not have any retirement benefits. However, I have life insurance and when the policy matures, I will have insured amount along with the bonus. I can use this money as retirement benefits.

Getting a Loan Against Your Life Insurance Policy

Yes, you read this right. You can get a loan by using your policy as collateral. One of the interesting benefits offered by life insurance companies is the option to get a loan against your insurance policy. You can get upto 90 percent of the funds you have paid as premiums. Let say, you pay premium of $100. In five years you have paid $500 to the insurance company as premiums. You are now eligible to get 90 percent of $500, or $450, as loan. You do not need extra collateral to get a loan, you can use your own policy as collateral. In order to be eligible for the loan, you should have paid at least 2 premiums. 

How to get loan from life insurance policy?

You can get a loan from your life insurance policy in two years, one, from a financial institutions that offer loan against insurance policy, two, from the insurance company itself.

How to Fund You Child’s Education Through Insurance?

If you earn fairly well, you might be able to support your kids education until he is in school. Once he is ready to go to college, you might need a lot of money to pay for your kid’s college fees. Let’s say your child want to go to a medical school or engineering college. Can you actually support your kid’s education of you do not have a big savings? Here lies the importance of insuring your child.

Let say, you buy an insurance policy for your kind when he is born. You pay the premium for 10-15 years. By the time the kid is ready to start his college life, you will already have some money to pay for college fees.

What if you become terminally ill or die? In a situation like this, who is going to support your kid’s education? Buying an insurance policy for your kid helps in the situations like these.

Is Insurance Investment or a Liability?

Investment means putting money in something that will give you dividends in the future. Liability means something that you are obliged to pay.

Do you think insurance is an investment or a liability?

Generally speaking, insurance is an investment. You pay the premium and if something unwanted happens during the insured period, the insurance policy will cover your loss and damages and you get return on your investments.

Quite opposite to this general theory, insurance can also become your liability. Paying your premiums can become a financial burden of you have bought a lot of policies. Let say you have bought a house insurance, auto insurance, health insurance, life insurance, or even insurance policies for your family members. Unless you earn a lot of money, paying premiums for all these policies can be a financial burden.

Different Types of Life Insurance Plans

There are different kinds of life insurance, for example...

Term life insurance

Whole life insurance

Universal life insurance

 Final expense insurance

Simplified issue and guaranteed issue insurance

Group life insurance

Endowment Insurance

Money Back Insurance

Child Insurance

Retirement Insurance, etc.

Each of these life insurance plans have their own characteristics and provide different kinds of coverage and benefits. For example, term life insurance policy means you get coverage for fixed term, for example 10, years, 20 years, etc. During this coverage period, you will get coverage for accidents, diseases, etc, and by the end of your term you also get insured amount.

Whole life insurance policy provides death benefit to the beneficiaries, whereas Universal life insurance policy provides coverage for your entire life. What this policy will cover depends on the terms explained in the policy document. Retirement insurance means you pay premiums for 20 years and the get benefits for rest of your life, it is just like the retirement plan that the government gives to its employees.

Since there are different kinds of life insurance policies, you might be confused about what type of insurance plan to choose. The choice of plan depends on your priorities and income. For example, if you want your family to benefit, whole life is better. If you do not have a long term job and do not have any retirement benefits retirement insurance plan can be better.

Building Your Wealth Through Term Life Insurance Policy

You cannot build your wealth through saving, you can build your wealth only through investment. You can either invest in your own business or invest in someone else’s business (equity or stocks). However, investment is risky, therefore, a lot of people avoid investing. Investing also requires a lot of funds and not many people have that kind of liberty.

So, do we have any option?

Off course!

Buy a term life insurance policy

First of all life insurance incorporates both, saving as well as investing. You get better returns than saving but do not have any risks associated with investing.

Secondly, you don’t need a lot of money to buy an insurance policy. Your premium is just a fraction of ensured amount.

If you bought a 20 years policy when you were 20 years and pay premiums for 20 years, by the time you are 40 you will have substantial funds. While the return on your investment might not be as good as stock market investment, however, you don’t always get profits from stock investment, however, you never make a loss with your insurance policy. Return is 100 percent guaranteed. If you encounter accidents or terminal illnesses during your insured period, you also get covered financially.

Buying Insurance Vs. Saving Money in Banks

A lot of people who make little money are too afraid to invest in a fear of losing money, therefore, whatever they can save, they will prefer to save it in a bank. But is saving money in banks a good strategy?

Well, I don’t think so.

If you have little money and if you think investing is too risky, yet you have a desire to make additional money from your money, buy a life insurance policy.

Is buying a life insurance policy better than saving money in banks?

Definitely!

If you buy a life insurance policy, you will be paying mandatory premiums regularly until your maturity period, you will never miss paying premiums.

When your policy matures, you will have a substantial amount.

However, when you are saving money in banks, you might miss your saving schedule because you had to use that money elsewhere.

Your normal saving accounts will give you a very small interest rate, you get a better interest rate on fixed deposit account but in order to use that service, you should already have a large amount of money.

Banks d not provide insurance coverage for your entire funds, however, life insurance will provide financial coverage for accidents and illness. If you die, your nominee will not have to pay the premium yet will receive the full insured amount.

 

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MicaR
MicaR

Web Designer and Content Creator


Online Venture
Online Venture

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