Life insurance has its own language. To understand the basics of Life Insurance is the key to finding the right insurance policy that protects yourself and your family against unforeseeable risks.
What you can expect inside this article: Basic Understandings about Life Insurance and its relevant Insurance terms, general benefits of Life Insurance, the critical determinants in the life insurance premium and how they affect the premium you need to pay.
What is Life Insurance?
Life Insurance is a contract made between an insurance company and an insurance buyer. The insurance company promises to pay an agreed sum assured to the designated beneficiary when the insured dies. To make the contract valid, the insured has to pay an amount of money – call premium – repeatedly to keep the policy in effect.
The premium the insured has to pay for a Life Insurance policy varies, depending on many factors such as age, total coverage, job, personal medical history, family medical history, gender, lifestyle, height, and weight matrix (Body Mass Index, BMI).
Even with the identical Life Insurance Type, the same sum assured, different life insurance policyholders may be required to pay different premiums.
Premium payment term is equal to the contract term, and it can be paid annually, semi-annually, quarterly or monthly.
Common Insurance terms
Policyholders: (Normally) 02 parties of the contract – any corporate or individual who fills in the Proposal and signs, commits to fulfil the terms as mentioned in the contract.
Life Insurance company (also called insurer): An enterprise issuing the life insurance policy, receiving the periodical premiums and paying out the sum assured as agreed to the beneficiary/ies upon the insured’s death.
Insured: The person whose life and health are covered by the life insurance policy. When the insured passes away, the death benefit will be paid out to the beneficiary designated by the policyholder. The policyholder and the insured can be the same person or can be different ones.
Underwriting: A process in which the underwriter of the insurance company assesses the risk of insuring the life insurance applicant. The process includes determining whether the insurer will accept the application or not. If yes, then how much coverage can be approved.
The Purpose of Life Insurance
The primary purpose of life insurance is to protect people against unexpected risks.
Life has many unexpected risks, there is no way to avoid risks completely. Therefore, smartly preparing for the unexpected should be a way, makes people feel more secure and optimistic.
Participating in a life insurance policy not only means getting money when people face the risk but also acts as a solid financial backing to save them when they are in need. For example, if you get sick, you can be assured of treatment at the best medical facilities with guaranteed hospitalization benefits.
When you, unfortunately, encounter a big incident in your life, you hold the chance to recover, or maybe just cover your day-to-day cost thanks to the timely sum assured.
Life Insurance doesn’t buy health or time, but it gives you the peace of mind you always need in life.
Besides, people also choose Life Insurance for its saving and investment benefit.
Life insurance is not only a financial reserve against risks but also a profitable “safe” to help you accumulate large amounts of money to realize your goals and dreams in the future easily.
How is Life Insurance Premium calculated?
There is no set cost when it comes to Life Insurance Premium.
The life insurance calculation formula is calculated and given by insurance professionals, and each insurance company will have a different method of calculating the premium for each product. As you know, the premium depends on five main factors: age, gender, occupation, health and the sum assured. But in fact, many other technical factors affect the formula of premium calculation.
There are different methods of charging each product from different insurance companies. Insurance companies have separate life insurance calculators. Accordingly, customers would need to provide personal information and needs for the consultants to enter data into the software and calculate the corresponding premium.
Even knowing that, it is still crucial for insurance buyers to aware of critical determinants in the life insurance premium and how they affect the money you may be supposed to pay:
- Age and health condition: Generally speaking, for the older insurance applicants (ex 50+), the premium will be usually higher as compared to a person of younger age because it is assumed based on the facts that:
– The older you are, the more likely you are to die unexpectedly
– The older you are, the more vulnerable to more health problems
- Sex: Because women are supposed to have more extended longevity, the premium for women to pay will usually be higher than that of men of the same age, same health conditions, jobs and insurance coverage.
- Occupation: If your job poses a risk to your health or safety, such as mining, firefighting, and high-rise construction, to name a few, the more likely you have to pay much more premiums than the people holding regular jobs. The higher the risk, the higher your premium.
- Total coverage amount: The more the insurance coverage amount is, the more expensive the premiums are—regardless of the policy type.
- Lifestyle information: Your hobbies are considered by insurance companies as data to assess the Life Insurance Premium you should pay. The essential information is whether you use tobacco or not.
Another tip is to use online insurance brokers like Best Insurance Online Canada, Life Insurance Quote Canada or Insurance Direct Canada. You can quickly know how much a specific Life Insurance will cost for your case.
We do hope that this article has given you a basic overview of Life Insurance. Understanding what life insurance is, how it works and how life insurance companies operate is essential before buying any Life Insurance products.
Frequently Asked Questions
Should I buy any life insurance package when I am in my 20s?
Yes, why not? You will get a very competitive premium for all kinds of life insurance at the age of 20s with the condition that your health overall is good. Take Term Life Insurance for example, it takes you about $400 per year for a 30-year term life insurance (valuing $500,000) when you are a man at 25 years old, while it will cost you nearly $700 annually when you start to buy a 20-year term life insurance package at the age of 45 (the same value: $500,000). Even when you choose a term life package lasting for only ten years but at 55 years old, your yearly premium (man’s) will be up to $1,000, with the same package value of $500,000.
At which age do we not need a life insurance policy?
We will not answer this question by telling you the exact age. Everybody’s lives are different, and nobody can say that the condition and demand of this 50 years old man must be the same as another man at the same age.
You may not need a life insurance policy when: you are wealthy enough to cover enough expenses that the insurance payout may help you in the future; your children can earn good money so that you don’t need to worry about their future or your future whole family’s financial status.
But if you fall into these two categories: parents with small kids and middle-aged people, you definitely should consider buying a life insurance package.
Is it true that the payout from the life insurance policy is tax-deductible?
Yes. Income from life insurance policy claims is exempt from tax. Therefore, individual customers who receive a compensation amount paid by a life insurance company as agreed in the signed insurance contract will not have to pay income tax on this amount. The State has given the best conditions for life insurance participants through tax incentives.
How much should I spend on a Life Insurance policy?
Theoretically, it is widely advised that about 10-15% of your income should be spent buying life insurance. However, spending on insurance depends on your needs and intentions (purposes) when buying insurance.
For example, suppose your goal is to prepare a fund for your child’s education when he reaches eighteen or prepares for his retirement plan at fifty. In that case, the first thing you need to do is determine how much money you want to have in the future’s time, then determine how long it will take to accumulate that amount.
A life insurance policy will help you achieve your goals if you lose the ability to generate income. Still, it is not a super profitable investment channel to only spend $200 / year but get 1 million dollars after ten years.
Should the whole family be covered under the same life insurance policy?
A whole family should not depend on only one life insurance policy for two reasons:
– The life insurance policy will terminate upon the death of the primary insured, and then all additional insured people will no longer be covered then.
– When having more than one person insured to a life insurance policy, the premium allocation is skewed towards additional insurance riders, thus affecting the policy’s refund value, making the total payout amount often less than the entire fee paid during the whole.
Therefore, it is ideal for separating each person into an independent contract with full insurance benefits. However, we know that many families can’t separate a contract for each person. They often want to buy the whole family of 3-4 people under the same contract to save costs, which makes the compensation value of the insurance package low when the insured event occurs.
If our family only has the condition to buy an insurance package covered for only one person, who should we prioritize?
In our opinion, again, you should question yourself what the biggest motivation/reason that makes you decide to buy a life insurance policy is. For us, it is wise to be aware of the critical role of life insurance policy – the temporary replacement of the main breadwinner of your whole family.