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7 Things You Should Know About Life Insurance
Life insurance is something many people either don’t believe in or don’t want to think about. This is because the word “life” automatically (and ironically) brings to mind it’s opposite: death. Along with other types of insurance, people often dismiss life insurance as a scam or a waste of money. However, what people often don’t realize is that the death of a family member can have significant consequences for the surviving relatives. In additional to funeral expenses, the deceased leaves behind tax liabilities as well as possible debt. More significantly, the family suffers from lost income. Even if there is an inheritance, all of the aforementioned expenses will have to be paid before the beneficiaries of the will are eligible to receive anything. Given these factors, there is a strong case for life insurance. However, there are some important things you should keep in mind when it comes to buying life insurance:
1. Life Insurance is not just for older/sick people
The sick and the elderly do have the greatest need for life insurance, but ironically (and unfortunately), someone in one or both of these categories will have a difficult time qualifying for it. Insurance companies will either charge them a very high premium or even deny their application altogether. Life insurance companies always assess the risk factors associated with insuring an applicant, and your age and state of health at the time you apply are the biggest ones. If you are already in a state of good health, then not only is there a good chance your application will be accepted, you will also get a good rate.
2. Your lifestyle could affect your premium
Another factor that insurance companies look at before issuing a policy is the person’s lifestyle. If you engage in high risk activities such as bungee jumping or skydiving, the insurance company may charge you a higher premium than someone who does not engage in such activities. The same goes for smoking. It is common practice for insurance companies to charge smokers much higher rates than non-smokers.
3. You can still benefit from life insurance while living
While life insurance benefits are usually paid out after the policy owner’s passing, it is still possible for you to have access to or benefit from the sum to be paid out. This is known as the “living benefits” of life insurance. Some life insurance companies allow the policy owner to have access to a portion of the death benefit if he/she has been diagnosed with a critical or terminal illness. This is quite reasonable as the policy owner may need to pay for medical expenses as well as personal care. Also, it can help replace some of the lost income the policy owner suffers as a result of the illness.
A person can also leverage their life insurance policy as collateral for a bank loan. Depending on the type of life insurance and the institution’s lending criteria, they can access a loan for the entire amount that the policy is worth. This can be a very useful tool for funding retirement, starting a business or saving on taxes. The policy owner can also borrow from the life insurance company itself.
4. Be aware of limitations
Life insurance is a formal contractual agreement between the insurer and the insured. As with any other contract, there are conditions that need to be met for the contract to remain in force. In order to minimize risk, there are certain conditions under which the life insurance company will not pay out the death benefit even after the policy owner dies. These conditions (also called limitations) are largely determined by legislation and the wording of the contract itself. However, some common conditions are: death from suicide, war or terrorism; lack of payment, and misstatement of personal information in the application form such as smoking status, age or medical history.
5. Be as truthful as possible in the application process
It is important that all questions on the application form be answered as truthfully and accurately as possible, to the best of your knowledge. Failure to do so can cause complications to arise if the insurance company discovers information about you that is inconsistent with what you stated (or omitted) in the application.
At worst, the company will either reduce the death benefit in accordance with the new information or even cancel the policy, thus denying you or your beneficiaries any benefit.
6. Be aware of your financial situation
Make sure that the amount you are paying for life insurance is in accordance with your current financial situation. You do not want to be paying premiums you cannot realistically afford, nor do you want to be underinsured. Your financial advisor can help you make a proper assessment of your financial needs.
7. Even if you have group insurance, it may not be adequate.
Belonging to a company plan does not mean you have no need for additional insurance. Very often these plans are basic and may not be adequate for your situation. Furthermore, once you leave the company the insurance coverage will end. Once again, a proper financial assessment is key.
Death is an unpleasant yet inevitable reality. While it is beyond our control, proper planning and preparation can minimize the impact it has on the ones we leave behind.