Jul 23, 2009

Life Insurance: Permanent vs. Term

The whole idea of getting a life insurance is purely for protection however, there are now a wide variety of life insurances, bundled with some form investments,promising better returns (cash value) and boasts wider coverage. But, before you pull your wallet and get excited please ALWAYS take time to know what you want, how much you can spare, and for how long you wish to keep the policy. Carefully selecting the right life insurance can spare you from disappoitments and save you huge sums of money in the future.

After careful deliberation, you'll surely be faced with the million dollar question - should you buy a permanent life insurance or term insurance? Here are some useful facts and tips you should consider first before buying.

1. Buy Life Insurance for Protection ONLY
Life insurance is NOT an investment vehicle and should never be considered as such. Many life insurance policies nowadays are bundled with some form of investment component that primarily makes your premium very expensive. To give you an idea, Term Life Insurance will only cost you around 10% of the actual cost you'll get from Permanent Life Insurance having the same coverage. Also, another reason worth mentioning is that investment component in permanent life insurance policies generally yields very low returns because it does not earn cash value in the first two years from your policy application.

2. Term Life: More value for less
If your young or a middle-aged dad like me, getting a term life insurance policy make alot more sense. A term life coverage at a younger age makes your premium very affordable and the likelihood of you cancelling your policy is less because it's cheap and sustainable. Fact is, many permanent life insurance policies are cancelled in the first 10 years for the very same reason.

3. Keep it lean and simple.
Do not buy some additional riders you wouldn't really need and most probably will not use. Insurance riders contain a lot of exclusions that is usually written in fine prints for very obvious reasons - they don't want you to know. Riders also drive your premium payments up and put more money into your agents pockets. The rule of thumb when getting a policy is, keep it simple and lean. The only exclusion to this rule, in my opinion, is the Waiver of Premium Rider (WoPR). This rider suspends premium payment but keeps your policy active when you become disabled.

4. Buy only from reliable source.
Always do your homework by knowing the financial standing of the insurance company you're buying a policy from. Don't be deceived by nice looking brochures or verbal promises made by your agent. Know their financial standing and get opinions from others. You have to know and make sure the company will still be there when you need them.

5. Select a professional insurance agent.
Surely, the first people who will approach you to buy their insurance are either some very close friends of yours or your relatives. My brother bought his from his mother-in-law which he eventually cancelled. My advice is stay away from them and get someone not related to you that can equally be trusted. This will make it easier for you to say no on offers you don't need or not be ashamed should you want to settle for a low-premium policy. This is one good reason why I find it difficult to cancel my policy which I bought from a close friend.

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