Life insurance – what is it & how does it work?
Term life insurance is the simplest, most popular and cost effective way to financially protect any dependents in the event of your death. While it won’t help those left behind to get over their loss, the benefit of a lump sum, in most cases tax-free, will guarantee your family isn’t deprived of funds during an already stressful time. With the cost of life insurance at all-time lows, now is the perfect time to get covered.
Life insurance premiums vary from person to person, with factors such as age, gender, current and previous health, lifestyle, term required, occupation and smoker status all having an influence. Risk is assessed with the use of what’s known in the industry as ‘mortality tables’ to determine the premium for a particular individual, in addition they take further account of other factors relating to medical history and lifestyle.
Whole of life versus term life insurance
Life insurance can be split into two main types, known as ‘whole life insurance’ and ‘term life insurance’. In essence, as the name suggests, whole life insurance provides coverage for the lifetime of the policyholder, whereas term life insurance provides coverage for the duration of an agreed period in time. For all policies it’s crucial to ensure that premium payments are kept up to date to keep cover in place. Term life insurance is a simpler option and a lot less expensive than whole life. Many famous financial advisers such– as Suzy Orman, Dave Ramsey and Clark Howard recommend that term life insurance for most Americans.
How much cover do I need?
It’s important to correctly identify your dependant’s financial needs to establish just how much life insurance coverage to have. A general rule is to choose a policy providing at least seven to ten times your annual salary, but more may be appropriate, with the amount varying depending on how you intend it to be used. Basically you decide how much you want your dependent’s to receive in the event of your death, and your premiums will be determined accordingly.