5 Factors To Consider When Selecting A Life Insurance Policy
- Jul 08, 2024
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5 Factors To Consider When Selecting A Life Insurance Policy
Securing life insurance is an important component of financial planning, as it provides financial security for your loved ones after any unfortunate events that may lead to your untimely death, or simply passing away in old age. Choosing the right life insurance policy can be quite challenging, as there are many options available in the market.
To choose the most suitable life insurance for you, it’s essential to consider several critical factors. After following this guideline which explores 5 key factors to consider when selecting a life insurance policy, you’ll be better positioned to choose the most suitable coverage for your needs, and bring reassurance to you and your family.
1. Policy Coverage: Amount & Duration
The first factor to consider when selecting a life insurance policy is naturally what type of coverage you’ll need, and the preferred duration of your policy. We recommend conducting a detailed life insurance comparison to ensure that your selected policy aligns with your household’s financial needs.
Generally, different types of life insurance can provide different types of payout structures. For example, income protection insurance is designed to provide ongoing payments over an agreed-upon period of time. Contrastingly, insurance like life cover or terminal illness insurance are designed to provide a lump sum payment.
Your policy’s coverage should ideally be substantial enough to meet your family’s financial needs, including allocating funds for managing mortgage repayments, your children’s education expenses, and perhaps even your funeral costs, if the worst were to happen to you.
Don’t forget to factor in future expenses or the impact of inflation in calculating your coverage estimates either. Here, you can work with a dedicated financial planner to develop projections for household costs in the next 10, 20, or 30 years to come. We also recommend communicating with your loved ones to ensure their input is considered.
2. Type of Life Insurance Policy
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As we’ve mentioned, there are different types of life insurance policies that are available to you. Identifying which policy type best suits your needs is imperative for making sure that your loved ones are adequately covered in the event of your passing or accruing an injury/falling ill.
The two main types of life insurance policies (i.e. life cover, rather than income cover) are term life insurance and permanent or whole life insurance. Typically providing cover for a specific term (usually 1-3 decades), term life insurance is considered to be a cost-effective option that provides cover for families in the event that the policyholder passes away.
Contrastingly, permanent life insurance is designed to provide lifelong coverage, often providing a cash value component that grows over time. That’s why it’s common for policyholders to secure permanent life insurance coverage earlier in life and maintain the policy over decades. The longer you have your policy, the higher your payout could grow.
After understanding these differences between these policies, you should be better equipped to choose a policy that best suits you and your household’s financial goals and risk tolerance.
3. Premium Costs
When finding a life insurance policy that suits your financial needs, it’s important to keep in mind that ensuring adequate coverage for your family isn’t the only priority you’ll need to factor in. The best policies also align with your current finances, meaning that paying your premium won’t cost you an arm and a leg and eat too far into your family’s regular budget.
The cost of a premium for any life insurance policy is largely dependent on a few internal and external factors. The external factors that are considered are mainly interest rates or indexation (i.e. the current cost of living and how it may impact a household’s expenses over time). The internal factors considered when calculating the cost of a life insurance premium include the age, health, lifestyle, and even the occupation of the policyholder, and how all of these variables impact the risk factor for the insurance provider.
Policyholders who work in high-risk industries (i.e. scuba diving instructor, bungee jumper, motorcycle racer, etc.) can expect to have a higher premium on their life insurance policy as the risk to insure is higher for the insurance provider. Similarly, policyholders with genetic predispositions to certain illnesses like cancer or diabetes may also have higher premium rates.
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Thankfully, consumers have the option to decide between stepped and level premiums, stepped premiums being premiums that increase in cost annually as the policyholder grows older, and level premiums being premiums that initially are a higher cost but can even out over time if policyholders maintain their policy over the long term. So if you are expecting to be a higher risk customer for your insurance provider, opting to invest in a level premium for your policy may allow you to accrue savings over time.
4. Insurance Provider’s Reputation and Financial Stability
When shopping around for any type of insurance policy, consumers are advised to do their due diligence on the providers they’ve shortlisted. You want to make sure that your insurance providers come with glowing client testimonies and haven’t been involved in any dodgy dealings. So do some research into the reputation and financial stability of all your shortlisted insurance providers!
Why is this so important? A reputable and financially stable insurance company ensures that your policy will be honored and that your beneficiaries will receive their death benefit as promised and with minimal hassle when it does come time to claim. Remember that choosing a reliable insurance provider can give you peace of mind, as you know that your loved ones will be financially secure in the future.
5. Policy Riders and Additional Benefits
The last factor we’ll be covering today is policy riders and additional benefits, which can enhance the coverage and flexibility of your life insurance policy. Riders are optional add-ons that provide extra coverage or benefits at an additional cost. These add-ons effectively help to waive the premium payments if you become disabled due to illness or injury and are unable to work.
Another common rider will be the accelerated death benefit rider, which allows you to access a portion of the death benefit if diagnosed with a terminal illness. Additionally, the accidental death benefit rider can provide you with an additional payout if death occurs due to an accident.
To choose the most suitable riders, you will need to assess the available riders and their costs to consider if they align with your needs and circumstances. These additional benefits can offer valuable protection and support in unforeseen situations.
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Selecting the right life insurance policy involves careful consideration. By thoroughly evaluating these factors and understanding your financial goals and needs, you can make an informed decision that provides financial security and peace of mind for you and your loved ones while safeguarding your family's future, and ensures that they are well-protected in your absence.
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General Advice Warning: This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is appropriate for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.
All information above has been provided by the author.
All information above has been provided by the author.
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