Finding the Right Life Insurance Policy

All things are rarely equal, and life insurance is less equal than most. If you had to line up a thousand people, chances are really good that you won’t find two of them that have will have exactly the same life insurance requirements. There are simply too many permutations.

This does not mean to say that there is no such thing as the ‘right’ life insurance policy. On the contrary: if you know how much you can afford to pay and what your need from a life insurance policy, you are already half way there. To complete the other half of the journey involves deciding on a policy type and then finally, determining which of the many insurers will meet your requirements best.

Here is a brief outline to guide you along your way:

How much can I afford to pay?

Many people make the mistake of looking at their after-tax income to see how much they can afford to pay for life insurance. This is guaranteed to provide a warped affordability picture, which in turn could lead to policy lapses. It is better to look at your disposable income instead. Disposable income is the amount you have left after paying all your mandatory liabilities: vehicle finance, school fees, utilities, rates and taxes, lines of credit and mortgages.

There is no reliable rule of thumb to help you determine what the ideal percentage should be that you apportion to life insurance. Instead, explore what the maximum is that you can reasonably afford to pay over an extended term.

Although this may seem like the cart is now in front of the horse, it is actually not. Unless the policy is a comfortable fit for your pocket, you will be tempted to let it go at a later stage.

What do I need from my life insurance policy, and how much?

In addition to the expenses related to the winding up of your estate, you will need to consider your liabilities and the amount of money your family will require to survive after you are gone.

There are some other things that you may want to think about, over and above the insurance payout to your family.

Additional Benefits

Many insurance policies come with additional benefits that you can hook on at a nominal rate. These would typically include dread disease-, trauma-, income protection- and disability cover.

Savings

Some policy types have a savings portion. The savings portion can, when it reaches a certain level, be used to cover your life insurance premiums.

Once you know what you need, you should ideally also decide how much you will need. When calculating your estimates, remember that the intention of life insurance is not to turn your family members into millionaires, but rather to ensure that they won’t suffer any financial hardship as a result of your death.

Which policy type is best suited to my requirements?

We are going to ignore those insurance types that are typically used to cover credit agreements. Instead, our focus will be on those that are designed to provide income and security to our families after we pass away.

These are, in brief:

Whole Life

Whole life insurance does not usually come with a savings portion, although some of the products will allow you to hook on additional benefits such as trauma, disability etc. The premium generally remains level. Once again, there are certain insurers that will allow you to increase your premium on the policy’s birthday, while others will allow you to up your cover by a certain amount every couple of years, without having to prove your health. The latter is called a ‘rider’.

Universal Life

Universal life policies are flexible policies that come with a savings portion and a variety of additional benefits. Universal life type policies normally allow you to increase and decrease your cover, your premiums, your benefits and your savings portion as your life’s circumstances change.

Insurers don’t only dress these two policy types up in a variety of different ‘costumes’, but they also give them catchy and interesting names. So you will probably need to scratch beneath the surface of their products to identify exactly what it is that you are dealing with.

Which insurer meets my requirements best?

Shop around and compare – we have all heard this truth a thousand times. Knowing what you can afford, what you want, how much of it you want and which product type you prefer, will make a comparison easier. Be sure to compare the policies feature by feature, to read the find print and to check the insurance company’s standing with their customers. For the latter especially, the internet is a valuable resource indeed.

In closing

Being a little flexible is a good thing. Being too flexible is not. If the shoe does not fit, rather lose it and carry on shopping. Chances are good that you will find what you are looking for somewhere along the line.