An insurance is essentially a financial protection against the risks of a possible loss that you contract with an insurance company. You might never need some of these (hopefully you won’t in most cases!) but without an insurance you or others around you might not be able to deal with the financial consequences when confronted with certain situations.
Choosing which types of insurance you need, which ones you don’t and making sure that the ones you have are still up-to-date and applicable to your current situation can be a bit of challenge, so in the next few steps we’ll go through the most common types of insurance you might need.We’ll be starting this mini-series with life insurance.
Why Life Insurance
A life insurance covers anybody who might financially rely on you for the financial consequences if you were to pass away. In essence you are not insuring yourself here, but other people around you who would suffer financially if you died. There are different situations in which people might depend on you financially:
- Your children who wouldn’t otherwise be able to provide for themselves;
- Your partner if you have a mortgage or other debt together. If you died your partner would potentially be unable to pay the debt themselves;
- Your partner if they are relying on your income, for example if they don’t work.
- Your partner if they are the one working and you are a stay-at-home parent. If you were to pass away, your partner would need to pay somebody to take over your responsibilities at home.
- If you have an other debt with a cosigner (i.e. somebody who guaranteed they would pay the debt for you if you no longer can).
- If you have family members with special needs who need ongoing care.
- If you have a business partner, you can name your business partner as a beneficiary so they can buy your part of the business if you died.
Types of Life Insurance
There are different types of life insurance and which one you want to choose depends on your personal and financial situation and could potentially change over time, which is why it is important to re-evaluate your life insurance every so often to make sure you still have the best insurance applicable to your situation.
- Term Insurance – with term insurance you pay a set monthly or yearly fee in return for a lump sum of money if you die during a specific time frame agreed, say for example 20 years. After that time, your insurance ends: you no longer pay fees and you are of course no longer insured. Term insurance is common when you take out a mortgage with your partner or if you have children who are under age. Term insurance is usually relatively cheap, especially when you are young, although it can become more expensive as you get older.
- Permanent or Cash Value Insurance – with permanent insurance you pay for a lasting lifetime insurance, making this type of insurance obviously a lot more expensive. Part of a permanent insurance is that the insured is essentially also investing money, since the insurance will need to pay out regardless (remember it’s permanent). You pay premiums for a certain amount of time and at the end of that time you can either leave the money as it is to serve as an insurance, or take out the money or even borrow parts of it, depending on the conditions agreed. There are three main types of permanent life insurance, including:
- whole life insurance in which the insurance runs for as long as the person lives.
- universal which is slightly more flexible than whole life, in which the insured can decide to change the premium paid as well as the amount of money paid out.
- endowment insurance is an insurance in which there is a maturity date upon which you will receive a lump sum of money depending on how long the insurance has been running for and how much has been paid in.
There are other types of life insurance which either offer a combination or a variety of the above. Of course what is most applicable to you depends on what your situation is and what you feel you need or how your situation might change in the future.
Step 57 – Life Insurance – in detail:
- If you already have a life insurance, pull out your insurance policy with its details and payments, including cancellation conditions.
- If you don’t have a life insurance, check whether you should consider taking out insurance. Refer to the list above with some common reasons to contract life insurance. Alternatively contact a financial planner and make sure to inform yourself about whether life insurance is needed for your situation.
- Determine whether term or permanent life insurance is (still) the best option for you and your situation.
- Get quotes from some different insurance companies for a life insurance, even if you already have an insurance, to make sure you’re still getting the best conditions possible. If you haven’t yet decided whether term or permanent is your best option, get quotes for both.
- Compare the quotes on several key factors:
- yearly contributions;
- whether yearly payments stay the same or go up or down (this can further depend on the type of insurance);
- conditions for canceling the insurance;
- lump sum payment conditions;
- special conditions for pay out: for example in the case of a terminal illness
- What is excluded? Think about death due to suicide, dangerous sports or crimes.
- If you’ve decided to contract or change a life insurance, schedule a day in your calendar with yourself to actually complete all the paperwork and cancel your current insurance if applicable.
- Life insurance can be very complicated and especially in the case of permanent life insurance complexity increases and conditions can be difficult to decipher. Consider the help of an independent financial advisor to make sure you have the best insurance for your situation.
Risk management and insurance is an important part of financial planning, although surprisingly often overlooked. Many feel insurance is boring, complicated or not needed and whether or not you agree with any of this, remember that years of careful financial planning amounts to nothing if a small oversight on your side leads to a financial disaster for you or your family.
Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.