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Life Insurance Policy 101
More than 10 million Malaysians say they need some life insurance policy but don’t have the means to get one. Part of this is explained by people overestimating the cost.
Perceptions about value and affordability may deter people from getting a life insurance policy. About half of those who responded in a certain insurance report say that a $250k term life insurance for a healthy 35-year-old folk would cost around $500 or more per year.
However, the average cost is close to $160 per annum. This is a big difference in the actual cost vs. perceived cost.
What Life Insurance Is
According to experts at Gibraltar BSN, life insurance refers to an agreement between insurance policyholders and insurers. An insurer guarantees to pay a certain amount of cash to beneficiaries when an insured individual passes away or after a pre-determined time in exchange for the premiums the policyholder pays.
In a life insurance policy, you must pay monthly premiums for the specified period, and the insurer provides comprehensive coverage in return. With a life insurance policy, you can safeguard your loved ones’ future by paying a lump sum called a death benefit.
How It Works
A life insurance plan involves paying out either regular payments or a lump sum upon death. This gives your beneficiaries the monetary support they need when you are gone.
The money amount paid depends on the coverage level you purchase. You choose how it gets paid and whether to cover other specific payments, including rent and mortgage.
There are two major types of life insurance policies. These include permanent and term life insurance. Life insurance companies provide different types of traditional life plans and term policies.
But mostly, companies will either focus on term life insurance only or permanent life insurance. You will hardly get a company offering both. And if you find one, they are probably unreliable.
This kind of insurance offers protection for a certain period. It might be as short as one year or as long as 5, 10, and 20 years.
Term life insurance policies are often sold with different premium guarantees. And the longer the assurance, the more initial premium you will pay.
If you pass away during a specified term period, the insurer will settle the face amount of that policy to all your dependents. But no benefits will be paid if you live longer or beyond the specified time.
As per the rule of thumb, a term life insurance plan provides death benefits without cash value or saving elements. Mostly, it may include policies like the following:
- Adjustable premium
- Renewable term
- Decreasing or level term
- Convertible term
A permanent life insurance policy usually stays in force for the entire life of the insured unless that policyholder surrenders the cover or stops to pay monthly premiums.
Compared to term, permanent life insurance is costly. It may include other types of insurance, like the ones listed below:
- Variable universal
- Whole life
- Indexed universal life
- Universal life
Permanent vs. Term Life Insurance: Key Differences
Term life insurance policies differ greatly from permanent coverage in a few ways, but they meet the requirements of many individuals looking for more affordable coverage.
Term life insurance cover only lasts for a specific period and pays death benefits when a policyholder dies before the time has expired. In contrast, permanent insurance remains effective, provided policyholders keep paying monthly premiums.
Another key difference encompasses the cost of premiums. In general, term insurance is much less costly than permanent insurance. That is because term insurance policies don’t involve building any monetary value.
Before applying for your life insurance coverage, ensure you assess your financial status as well as determine how much cash is required to maintain all your dependents’ standard of living.
For instance, if you are a primary caretaker and have three kids, you may want enough coverage to cover all your custodial responsibilities until they grow up and support themselves.
What Life Insurance Covers
A traditional life insurance policy covers almost all types of death, whether by accident, illness, or other circumstances. Upon your death, your dependents will use the death benefits paid to cover every expense, including:
- Medical expenses
- College tuition and childcare
- Mortgage payments and monthly bills
- Estate planning expenses
- Funeral costs and end-of-life costs
What It Doesn’t
A life insurance policy covers many causes of death, such as homicide, suicide, and natural/accidental causes. But some caveats can prevent your dependents from getting a payout.
Two major reasons insurers can deny life insurance claims include falsifications of the policyholders’ death and lapse in payments.
An insurer can deny your claim if health details were omitted or misrepresented. This is especially true during the contestability period. Usually, this is a two-year window after a life insurance policy starts.
Apart from these common reasons, your insurer can also deny claims based on the death circumstances. For example, if a policyholder passes away by homicide, an insurance company won’t cover that claim if the dependents are liable or involved in the insured’s death.
Key Features of a Good Life Insurance
As aforementioned, life insurance policies are contracts between an individual and an insurance firm. All life insurance policies are created differently. And the laws of every state regulating insurance coverage are different. But in general, many insurance policies include the following:
- Cash value
- Policy length
- Death benefits
What a Life Insurance Policy Can Do for You
Life insurance policies aim to cater to the financial security of your loved ones after your passing. This should be taken seriously. So before you procure a life insurance policy, re-consider the life you wish your loved ones to maintain after your passing.
Like other insurance, a life insurance policy comes with some perks. It will not just support your beneficiaries. It can also cover you against treatment expenses and serious diseases.
All whole or permanent life insurance policies provide coverage benefits. But they charge more monthly premiums than every term life insurance product. Whatever option you choose, consider the features that align with your financial goals.