WHAT IS LIFE INSURANCE?
Life insurance is a means to provide for a financial shortfall in the event of your death. It is a way to provide security for your surviving family when you are no longer there to provide an income. Business partners sometimes insure each other’s lives – especially where the loss of either partner could be critical to the continuation of the business.
Life insurance can be used to provide for the costs of burial, to cover the outstanding balance on the mortgage, or to provide a major capital sum to be used by the beneficiary.
In simple terms, life insurance is a wager a bet against the insurance company. The sum insured is the prize, the premium is the bet.
WHERE CAN I GET THE BEST ADVICE?
There are a few options when it comes to getting good advice and assistance in making the right choice.
* The Life Insurance Agent
A life insurance agent is usually employed by a specific insurer. The agent will have expert knowledge of the products and benefits offered by the insurer that he/she represents, and will be able to provide you with projected values, and the cost of the cover that you require. Some insurers sell their products almost exclusively through agents.
* The Independent Broker
An independent broker is not tied to an insurer. He can offer a choice of several insurers, and will be able to advise on the best options available.
Both an agent and a broker rely on commission for their earnings. Their incentive is to sell the product that pays the highest commission. However, they may be willing to negotiate a lower commission, or a different commission structure. They would rather earn some commission than none! There is no fee payable if you use one of these services. Commission is paid from the policy, and will directly affect the cost or value of the policy.
* The Independent Financial Advisor
An independent financial advisor will provide more comprehensive financial advice which includes life insurance as a component of your financial plan. A financial advisor charges a fee for his/her services, but will not be commission driven. This may be the best option to objective advice.
* Buy Direct
If you know what you want, some insurers provide the option to buy direct. Buying direct means that no commission is payable from the policy. That should translate into either lower premiums or better benefits.
HOW MUCH LIFE COVER DO I NEED?
Before making any decision, ask yourself these questions:
* Do I need life insurance and Why?
* How much life cover do I need?
* Who it is for?
* How much can I afford to spend?
Most brokers, agents and financial advisors will conduct a financial needs analysis’ to assist in identifying exactly what your financial requirements are. If you want to do this yourself, MSN Money provides a free Life Insurance Needs Estimator at: http://moneycentral.msn.com/investor/calcs/n_life/main.asp.
The needs analysis provides the capital requirement to cover outstanding loans, education costs and to provide an income for the surviving family’s living expenses.
HOW MUCH CAN I AFFORD?
Think about what you can afford carefully. If you can only just manage the premium, then it is too much. As soon as you suffer a financial setback the premium – and the policy – will be at risk. Thousands of policies lapse each month and many more become early surrenders. To rephrase – how much you can comfortably afford?
BALANCE YOUR FINANCIAL PORTFOLIO
Try to balance your life insurance needs with a complete financial portfolio of investments and retirement funding. A good financial advisor will be able to suggest a suitable basket of investments and insurance to meet your needs. Most financial analysts agree that between 10 and 15 percent of your income should go towards investment. Only a portion of this should be to life cover. Money invested grows. Money paid in life premiums just disappears – unless you die!
WHAT TYPE OF LIFE INSURANCE DO I NEED?
* Term Insurance
Term insurance is the least expensive option. Premiums are fixed for the term of the policy. You are covered by the sum insured for a fixed term. If you die a day later you get nothing! Your beneficiary will be paid the sum insured if you die while the policy is in force. Some insurers offer a premium return plan for a little extra.
* Whole Life and Endowment Plans
Whole life and endowment policies include an investment portion. Premiums are higher than for the term option but the policy has a cash value – even if you live. This type of policy may also be used as security against loans and may include options to cash-in a portion of the investment and still retain the life cover.
Whole Life policies often work on a universal life basis. The policy includes an investment portion which is used to offset the risk cover. The more the investment grows, the less spent on risk. Universal life is an ingenious concept and a very efficient option. The setback lies in the expenses and commission that life companies charge against these policies. Variations include flexible policies where the investment portion may be increased or decreased from time to time by the policy holder. One such option allows for a premium holiday if the investment portion is sufficient to cover the cost of life cover.
* Additional benefits
Disability cover is an additional option or ancillary benefit offered by insurance companies. This is very profitable business for the company as very few claims are ever paid. Read the conditions very carefully before taking out disability cover. Your own understanding of disability is almost certainly very different to the insurance definition.
* The impact of commission
Life insurance options that include investment are generally favored by insurance brokers and agents. These types of policy attract huge amounts of commission. There is a large incentive to sell this type of policy. The commission charged has a major impact on the long term value of any investment. The investment is locked into the policy until the policy is cashed-in or the insured dies.
COST EFFECTIVE INSURANCE
A more cost-effective choice is to couple term insurance with a separate investment where costs are much less. If there is a return of premium option then take this as well. The chances are that you will still be alive at the end of the term, so why write-off the premiums? The disadvantage of this choice lies in the discipline required to maintain the investment.
CONCLUSION
Universal life policies make a lot of sense as the value of the investment reduces the requirement for life cover. However, high commission charges reduce the effectiveness of this type of policy. If you can negotiate a lower commission or a spread commission option, then this type of policy is worthwhile. Otherwise take out term insurance.
Once you have sufficient investments, you do not need life insurance. Rather use additional funds for more investment.
Finally, do not take out a life insurance policy for investment purposes only. Life insurance is there to provide insurance against death – nothing else.