Photo: KnowInsiders
Photo: KnowInsiders

What is a life insurance policy, and what are its key features?

A life insurance policy is an agreement between an insurance company and a person (or legal entity). Each life insurance policy is different, and each state’s laws regulating insurance policies are different. In general, most insurance policies identify the following:

  • The insurer: Only certain companies can provide life insurance, and these companies are regulated by state insurance departments.

  • The policyholder: The person or entity (such as a family trust or a business) which owns (or “holds”) the policy. The policy can insure the holder, or it can insure another person.

  • The insured: The person whose life is insured.

  • The death benefit: The amount the insurer will pay when the insured passes away.

  • The beneficiaries: The people or entities that will receive the death benefit. It can all go to a single person (e.g., a surviving spouse) or it can be divided by percentage among many different people and entities (e.g., three children could each get 30% and 10% could go to a charity).

  • The policy length: The time period that the insurer agrees to pay a death benefit. This can be a specific term (e.g., 10 or 20 years) or it can be permanent – a policy that lasts for the life of the insured for as long as premiums are paid.

  • The premium: The monthly or yearly payments needed to keep the policy in effect.

  • The cash value: Permanent life policies, like whole life insurance, have a cash value component that builds over time and can be cashed out or borrowed against.A term policy has no cash value.

What are the different kinds of life insurance policies and how do they work?

Photo: The Financial Express
Photo: The Financial Express

There are two basic types of life insurance: term and permanent life insurance.

A term life insurance policy provides coverage for a specific period of time, typically between 10 and 30 years. It is sometimes called “pure life insurance” because unlike the permanent policy or whole life insurance, there’s no cash value component to the policy – once the term is over, there’s nothing left.

Permanent life insurance provides coverage that lasts your entire life. Unlike term, it’s not a “pure life insurance” product because it includes a cash value component which helps make coverage last while the insured is alive and premiums are paid, and while providing other financial benefits. A portion of your premium dollars are invested, and your cash value grows tax-deferredover time – but the entire death benefit is immediately payable from the first day you have the policy. The cash value, on the other hand, may take some years to build up to a significant amount.

There are two main types of permanent insurance: whole and universal life. Whole life insurance is simpler – the premium remains the same for life, the death benefit is guaranteed,and the cash value grows at a guaranteed rate. Universal life insurance can be less expensive, but the premiums, death benefits, and cash value growth rates can vary, making the policy more complex.

Best Life Insurance Companies of 2021/2022

Best Overall: Prudential

Best Instant Issue: State Farm

Best Value: Transamerica

Best Whole Life: Northwestern Mutual

Best Term Policies: New York Life

Best for No Medical Exams: Mutual of Omaha

Best for Military: USAA

How can you choose the best life insurance plan?

Here is a guide to help you select the right policy that suits all your needs.

1. Assess your life insurance goals

Goals may vary from person to person. You must plan for your life insurance goals with the help of a suitable life insurance policy. If safeguarding your family’s financial security is your primary goal, you can buy a term insurance plan that offers high coverage at affordable rates.

If you are looking to save for your child's education or thinking of buying a dream house for yourself, you can consider investing in a unit-linked insurance plan. You can also buy a retirement plan which will ensure regular income for your everyday expenses post-retirement.

2. Calculate the optimal insurance cover that you need

Many financial advisers suggest that your life insurance cover should be at least ten to fifteen times of your annual income. However, there are several elements that you should consider while estimating the ideal life insurance amount.If you have debts, then meeting the Equated Monthly Instalments (EMIs) might be challenging for your family in your absence. In addition to this, you need to arrange funds for your children’s higher education or marriage. As a result of inflation, your family might also face difficulties in maintaining their current lifestyle in the absence of the principal breadwinner. Thus, you need to find the total of the following:

• Your family’s annual expenses multiplied by the number of years for which income replacement might be necessary

• The total amount of your outstanding debts and the cost of repaying mortgages, if any

• The amount you need to set aside for future expenses like your child’s education, wedding, etc

From the expenses mentioned above, you can deduct the sum of your liquid assets like cash in hand or bank and any other kind of investments to arrive at an adequate life insurance cover.

3. Determine the amount you have to pay as the premium and find the policy offering the best deal

You can use online premium calculators to ascertain how much premium you have to pay for the required amount of life insurance. Compare different plans to find a policy that offers the highest coverage at rates that fit your budget. You should also assess your premium paying term based on your earnings for the upcoming years.

4. Select the correct policy term

The term of the policy should ideally be the number of years your family will be financially dependent on you. The general thumb rule for deducing the ideal policy term is to subtract your current age from the age at which you expect your income to stop or wish to accomplish a particular life goal.

5. Opt for a reputable life insurance provider

Life insurance companies with a Claim Settlement Ratio (CSR) of over 95% for consecutive years are generally considered reliable. The CSR is the percentage of claims that the company has settled in a financial year compared to the number of claims placed. You can visit the Insurance Regulatory and Development Authority (IRDAI) website to view the updated CSR of different insurance providers in India. It is also advisable to read customer reviews and understand whether your life insurer's claim service is fast and hassle-free.

6. Do not conceal facts from your life insurance provider

If you consume tobacco or alcohol, or work in a hazardous industry, inform your life insurer about these details. You must also declare any existing illnesses or family history of critical ailments. These factors influence your risk profile. Providing accurate information is vital to prevent claim rejection in the future.

7. Read the final policy document carefully

Understand all the terms and conditions clearly, before you make the final commitment. Find out relevant details such as the lock-in period and the circumstances in which the claim will not be valid.

8. Buy life insurance at an early age

Life insurance premiums are lower when you are younger. Thus, you can save on the cost of your premium if you buy your life insurance policy as soon as you start earning. You can begin with lower coverage and add more riders as your income increases.

9. Choose a comprehensive plan

Medical contingencies might affect your income adversely. Hence, it’s necessary to choose a comprehensive plan, with appropriate riders for yourself:

• Critical Illness rider provides full claim payout if you are diagnosed with any serious medical condition like kidney malfunction, cancer, or cardiac diseases. This amount can be useful in meeting treatment costs and protecting you against the loss of income due to such illnesses

• Accidental Death Benefit rider provides your loved ones an additional amount in case of your sudden demise due to an accident. This safeguards your family’s future from the threat of impairing the regular flow of income to maintain their current lifestyle

• Permanent Disability rider functions as a waiver for all your future premiums if you are permanently disabled due to an accident. Your life cover continues throughout the remaining policy tenure

• Terminal Illness rider gives you access to funds for dealing with terminal ailments like cancer by providing full payout before death

It would help if you always looked for an insurance provider that offers such benefits without charging you any hidden fees.

10. Evaluate your life insurance needs regularly

It is essential to assess your life insurance needs from time to time as your financial goals might change with age and life events like marriage or childbirth. You can review your life insurance needs periodically and adjust your cover accordingly. This will also take care of inflation.

Photo: Dreamstime
Photo: Dreamstime

Tips to choose the right life insurance company

Life insurance is a highly competitive business, in which the salesforce depends almost entirely on commissions.

Insurance companies pay fat commissions for selling whole life policies; perhaps 80% of your first year's premium goes to the agent. Commissions for selling term-life policies amount to roughly the same percentage of first-year premiums. But since whole-life premiums are much higher than premiums for term-life policies with the same death benefit -- they can be five to ten times more -- agents make much more money selling a whole-life policy than they do selling a term policy.

You and your family, is follow some basic tips – and in no time, you’ll be on the right path to finding a company that’s a great fit for you and your budget.

Financial wellness

People buy life insurance for many reasons, but the biggest one of them all is to ensure that their loved ones are in good financial shape no matter what. Similarly, the life insurance company that you choose must also be in good shape from a standpoint of dollars and cents.

Products offered

Term life and permanent life insurance are the two life insurance products an insurance company offers most. Many insurers will carry both types, while some may just specialize in one product or the other.

Think twice before working with a life insurance company that claims to specialize in every type of insurance under the sun. We think it’s better to choose life insurance from a company that specializes solely in life insurance products. That way you can be sure you’re working with a seasoned life insurance professional who can help you customize your policy to fully protect your loved ones and be as cost-effective as possible.

Customer Satisfaction

Some of the oldest, most experienced insurers in the U.S. today are life insurance companies, operating for more than 100 years in several cases. This fact alone is a good indication that a company knows what it takes to serve its customers.

However, a lengthy tenure doesn’t necessarily mean a life insurance company has a stellar track record.

Cost of coverage

The healthy amount of competition in the life insurance industry helps keep premiums affordable, as several polls over the years have shown. But be careful not to instinctively buy the plan that costs the least. After all, our research shows that shoppers aren’t necessarily after a bargain basement life insurance company.

Who Owns the Company?

When it comes to life insurance, a lot of people think that their best choice is to buy from a financial services, or insurance behemoth with publicly traded stock. The thing is, that’s not always the best idea.

Why? Because big corporations answer first and foremost to their shareholders. The decisions they make, the prices they set, the products they sell are all designed to deliver maximum profits to the people who own their company’s stock. Which means customers don’t come first.

10 Best Life Insurance Companies In The World 10 Best Life Insurance Companies In The World

If you are wondering about the best life insurance companies to protect your family, here is the list of the top 10 best life insurance ...

Things to Consider when Choosing the Right Type of Life Insurance

Life insurance premiums are based on a number of factors and we'll clue you in on six of them:

1. Age

One of the critical elements in determining what life insurance product you choose—and even what products are available to you—is your age. The younger you are, generally the more options you'll have to choose from. For some life insurance products like basic term life insurance, your eligibility to purchase ends at the age of 60.

2. Gender

Additionally, females tend to live approximately seven years longer than males, which translates to a less expensive policy for women. However, the gap on that life expectancy difference is starting to close. Age and gender will be the basic factors in the pricing of your life insurance premium.

3. State of Your Health

Most every life insurance policy will require either a physical exam or for you to answer some medical questions to determine your state of health. It probably goes without saying that the healthier of an individual you are, the less expensive your insurance policy will be.

Smoking is also a big, negative factor when pricing life insurance. If you list nicotine, you cost will be significantly higher.

Keep in mind that life insurance companies tend to correlate your age with your health. Therefore, the younger you are, the healthier you're expected to be, and vice versa.

4. Budget

Relatively speaking, term life insurance tends to be less expensive when compared to permanent life insurance; that can be attributed to the policy being in effect for only a specified period of time and the fact that no cash value is being built up inside the policy.

With a term insurance policy, you select a term—usually 10, 20, or 30 years—over when your life is protected. When that term evaporates, if you want to maintain that particular policy (which is usually due to the fact that your health has declined dramatically) a new rate is calculated, and it will increase significantly. A permanent insurance policy sets the policy in place for the duration of your life and will maintain the same fixed premium throughout the policy.

If you're really budget minded, you may consider term life insurance. Sometimes referred to as "starter life insurance," term life allows you to buy a policy that is convenient and fits your budget. If you went through a needs analysis with a licensed agent, it may indicate that you should have more coverage, but term life insurance is a good start!

5. Duration of Need

Are you interested in a policy that protects you for only a certain period of time? For example, you may have just purchased a home on a 30-year mortgage and are interested in securing life insurance. If one of your biggest considerations is ensuring that your mortgage balance will be resolved after your passing, then a 30-year term insurance policy might be best for you.

However, if your major concern is having protection in place even 45 years from now, a permanent life insurance policy is better suited for your needs.

Consider term life insurance if...

You need life insurance for a specific period of time. Term life insurance enables you to match the length of the term policy to the length of the need. For example, if you have young children and want to ensure that there will be funds to pay for their college education, you might buy 20-year term life insurance. Or if you want the insurance to repay a debt that will be paid off in a specified time period, buy a term policy for that period.

You need a large amount of life insurance but have a limited budget. In general, this type of insurance pays only if you die during the term of the policy, so the rate per thousand of death benefits is lower than for permanent forms of life insurance. If you are still alive at the end of the term, coverage stops unless the policy is renewed or a new one is bought. Unlike permanent insurance, you will not typically build equity in the form of cash savings.

If you think your financial needs may change, you may also want to look into “convertible” term policies. These allow you to convert to permanent insurance without a medical examination in exchange for higher premiums.

Keep in mind that premiums are lowest when you are young and increase upon renewal as you age. Some term insurance policies can be renewed when the policy ends, but the premium will generally increase. Some policies require a medical examination at renewal to qualify for the lowest rates.

Consider permanent life insurance if...

You need life insurance for as long as you live. A permanent policy pays a death benefit whether you die tomorrow or live to be over 100.

You want to accumulate a savings element that will grow on a tax-deferred basis and could be a source of borrowed funds for a variety of purposes. The savings element can be used to pay premiums to keep the life insurance in force if you can’t pay them otherwise, or it can be used for any other purpose you choose. You can borrow these funds even if your credit is shaky. The death benefit is collateral for the loan, and if you die before it’s repaid, the insurance company collects what is due to the company before determining what’s goes to your beneficiary.

Keep in mind that premiums for permanent policies are generally higher than for term insurance. However, the premium in a permanent policy remains the same no matter how old you are, while the term can go up substantially every time you renew it.

There are a number of different types of permanent insurance policies, such as whole (ordinary) life, universal life, variable life, and variable/universal life. For more details, see our articles on the specific types of policies.

Best Tips To Purchase Health Insurance Best Tips To Purchase Health Insurance

Buying insurance is a significant investment, and you’ll want to invest wisely. Check out this article to know 10 tips to consider before buying health ...

Most Weirdest Insurance Policies Around The World Most Weirdest Insurance Policies Around The World

What are the weirdest insurance policies in the world? Insurance is available even after the escape of aliens, vampire and bride run away in marriage, ...

What Is Mortgage Insurance and How Does It Work? What Is Mortgage Insurance and How Does It Work?

What is mortgage insurance, how it works, and what are its benefits? Scroll down to understand more details about the advantages of mortgage insurance.