Life Insurance Shopping Basics

Shopping for life insurance need not be a daunting task. Once you decide what type of life insurance you want, which benefits you would like to hook onto the policy, and how much cover you require, the rest becomes quite simple.

To help you reach this point, we take a brief look at each of the questions you now have to answer.

What type of Life Insurance do I require?

Simplistically viewed and broadly speaking, all life insurance policies can be divided into one of two types: The first type you will pay towards for a specific number of years (Term Life), and the second type you will pay towards until your death (Whole Life).

Term Life

Term life insurance policies allow you to purchase life cover for a fixed number of years so as to accommodate a temporary increase in the amount of cover you require. Although some of the term life policies now incorporate a savings portion that becomes payable at the end of the term, most of the policies will simply fall away if you don’t die by the time that the policy expires.

Whole Life

Whole life insurance policies run for the duration of your life time and generally form a part of your long term financial planning. In its purest form, you will be required to pay a whole life insurance policy until your death. Because the insurers understand that the financial burden associated with paying life insurance may become too cumbersome after retirement, some of them created a whole life product where you either pay less or stop payment altogether at a certain age without losing your death benefit. Some insurers also offer an investment option as a further enhancement. If you decide on this option, a payout will be made after an agreed number of years without your life cover being affected. Naturally, these combination type products are more expensive than their pure whole life counterparts.

What to ask yourself if you need to decide

  1. Do you need life insurance to cover the risk of death for a specific period only, or do you need the cover for the indefinite period until your death?
  2. Do you want a cash value to realise at the end of the term or, in the case of a whole life policy, at a certain age?
  3. If you opt for whole life insurance, do you want to reduce or stop your payments at a specific age without losing your life cover?

What additional benefits should I add?

When you purchase life insurance you will be in a position to add ancillary benefits at a small additional charge. Here are some of the most common ancillary benefits you are likely to find on offer when you buy a life insurance policy:

Waiver of Premium

If you become disabled, your premium will be waived. Although you will no longer be required to pay your premiums, your life insurance policy will remain in force.

Disability

Disability cover is normally calculated as a percentage of the life insurance cover you buy, and could include total disability, temporary disability, the loss of limbs and the impairment of one or more of your senses.

Dread Disease

Like disability, dread disease cover is an accelerated death benefit that pays out if you suffer from one of the traumas (stroke, heart attack etc.) or contract one of the diseases (cancer, brain tumours etc.) listed by the insurer.

Accident

Should you die in an accident, the insurer will in addition to your existing life insurance cover, pay a further amount of money to your beneficiaries.

What to ask yourself if you need to decide

Do you want your life insurance to only address the risk of death, or would you like to add one or more of the ancillary risk products that can be hooked onto your life insurance policy? If you want to add ancillary benefits, differentiate between those that you consider essential and those you consider optional.

How much cover do I need?

Cover is highly individualised because the ‘right’ amount will depend on your personal set of circumstances. One of the quickest and easiest ways to gain an objective idea of how much will be needed, is by using an online calculator like the one on MSN: http://moneycentral.msn.com/investor/calcs/n_life/main.asp.

To conclude

Once you know what and how much you need, you will be in a good position to start doing comparative shopping. Remember to look beyond the rates charged though. Also include the products’ terms and conditions and the insurer’s reputation in the industry to your evaluation criteria.