How does life insurance work?
Life insurance acts as a contract between you and your insurance provider. You agree to pay premiums to maintain your contract and they agree to pay out your policy (the “death benefit”) to your named beneficiaries in the event of your death. Life insurance is essentially a financial safety net for any of your dependants.
Life Insurance Monthly Cost
The average monthly cost for life insurance tends to average out at less than $50 a month. These costs will vary depending on the insurance provider as well as the personal details of the policy holder, i.e. their age, gender, health, weight, occupation, lifestyle and proclivity to smoke. It is important to bear in mind that each insurance company will consider all these factors differently, thus why it is worth obtaining quotes from multiple providers.
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How do I get a life insurance policy?
Source quotes from different providers to narrow down on a policy that will suit your needs and match your budget. Once you’ve done this, then select your coverage amount and any accompanying riders you want to add on.
Apply for Coverage
To apply you will have to submit your personal details, contact details and any supporting information regarding your income and employment. Some providers may also require that you fill out a health questionnaire or go for a medical exam.
Pay your Premium
You’ll have to pay a monthly or annual premium in order to keep your policy active. Policies will lapse if payments are not made.
How much coverage should I buy?
It depends on your budget but there are 3 main things to consider:
Aim for a policy that will replace your income and cover your family’s cost of living for five to 10 years. Take your current salary and multiply by five or 10 to get an indication of the level of coverage that you need for your income.
Your policy also needs to protect any assets that you’ve acquired through your life, such as a house, car, savings account, etc. Determine the value of your assets and add that dollar figure to your coverage.
Determine your expenses and extrapolate into the future; include any anticipated expenses such as childcare or college tuition.
How to compare life insurance policies
Examine how the level of coverage will affect your premiums, as well as the flexibility of your policy and any riders or extra features that are specific to the providers.
Key questions to ask include:
What is the minimum and maximum coverage I can buy?
Each provider’s policies will have limits to what they pay out in the event of a claim. Some insurers will cap coverage for certain occupations and different age groups.
Do the policy’s terms come with age restrictions?
Policies do vary depending on the age of the policy holder, and some policies may automatically stop covering you at a certain age. Due to this, it is particularly challenging for seniors to find life insurance policies during their later years.
Can I purchase additional insurance without a medical exam?
Some insurers do offer this and, instead of the medical exam, request that you complete a short online questionnaire in its place. Bear in mind though that this “no medical exam” option usually comes with higher rates.
Which features are included in my policy — and does it offer riders?
Included features are important, and if you find that the policy isn’t as flexible as you’d like, ask about the available riders so you can better customise your policy to suit your needs.
Can I combine the policy with other types of insurance?
Many insurance companies offer discounts if multiple policies are taken out from the same provider. Depending on the insurer, you might be able to combine different features and areas of coverage within one overarching policy.
Does the policy exclude specific occupations?
Some high-risk industries and occupations may be excluded from certain insurer’s policies. Conditions on coverage do vary – there may even be a provider that specializes in your field who could potentially offer you a more affordable rate than a more generalised provider.
Take advantage of the “free look” period
The cooling off period after you purchase your policy allows for some wiggle room where you can make changes to your policy, or even reject it altogether if you happen to come across a better one. Make sure you find out how long this period lasts for however, and when it actually begins, as it varies with different providers.
Compare apples to apples
When getting quotes make sure you are comparing the same thing – term life policies generally have lower premiums than permanent life policies thus the big difference in price, but they are two very different things! It’s important to examine the detail and read the fine print – not just go by the monthly premium.
Understand that life insurance is designed for protection
The main idea behind life insurance is to ensure your beneficiaries are protected financially in the event of your death. Despite some permanent life insurance policies having potential to allow policy holders to earn cash value over time, policies should be considered as a means of protection first, and not as a method of investment.
Enhance your coverage with policy riders if necessary
Riders or endorsements are extra ways to add customization to your policy to better suit your needs and budget. When you decide on a policy, make sure to ask about what riders are available to be purchased alongside.
Buy from a reputable life insurance company
Not all companies are the same! It is important to do the background on the insurance providers and ensure they are reliable prior to committing to one of their products.
Should I buy directly through an agent or through a broker?
You can buy insurance from both agents and brokers. Each have their own advantages and disadvantages to contend with. Brokers have a wider feel for the marker due to working with a variety of different companies in their network and this wide-angle lens can help determine the best prices for the coverage you need. Agents on the other hand may not have this wide-angle lens but are far more specialised and can better assist with personalising your policy from a particular provider. The most important thing is to ensure you have considered all your options when looking for life insurance and making sure you have evaluated the cost-benefits of each.
What if I already have life insurance through work?
That’s great! However, like with many policies provided by organisations, there are often limitations, e.g. the claim capped at small amounts like $100,000 which can leave you under-insured. Work policies also only apply as long as you are working for that company – if you change jobs you will lose the coverage.
Can I change my beneficiary?
Yes, you can list and change beneficiaries on your policy – including what percentage of the death benefit is due to each beneficiary. It is common to name direct family members as beneficiaries, but you can choose others, e.g. friends, business partners, charities or legal entities.
Can I adjust my coverage level?
Yes, some specific policies will allow you to increase or decrease your coverage if you suspect you may need to change your coverage later on:
- Variable life, universal life and variable universal life – these are permanent policies that also have built-in flexibility to allow you to change the coverage amount. Changing the amount however, does have an impact on the death benefit.
- Decreasing term life insurance – this is a type of “term life insurance” where the amount paid out by the death benefit gradually decreases as you age. This is most suited for those who expect that they will have less debt in the future.
Can I cancel my policy?
Yes you have the ability to cancel your insurance but bear in mind you’ll only receive a refund of any premiums if you fulfil certain criteria:
- You cancelled during the “free look period.” – providers are legally obligated to provide a “cooling-off” period in which policy holders may change their mind about taking out the policy. This timeframe varies between 10-30 days depending where you are geographically as well as which provider you go with.
- You bought a rider that covers return of-premium – if you bought this supporting rider alongside your policy, when you cancel it means that you’ll be reimbursed for the premiums paid (minus any administrative processing costs).