Life insurance: A lifetime of security for those you love
When Mohammed first bought a term insurance plan, he was only 24 years old, unmarried and at the threshold of a successful career. He opted for a small life insurance cover of AED 800,000.
At the age of 28, Mohammed got married and in a couple of years he welcomed a baby girl to the family. It was then that he realised his insurance cover of AED 800,000 would not be adequate for his growing family. Mohammed revisited his policy, and to his luck found that it had a special feature.
The policy automatically topped-up his sum assured at various life stages. So now, at the age of 30, Mohammed’s sum assured is AED1.5 million. He is confident that his wife and daughter will have sufficient financial security should anything happen to him.
Easy concept, complex decision
Life insurance isn’t really a difficult concept to understand. It is, in fact, extremely simple: You buy a policy that pays out to your beneficiary or beneficiaries when you pass away. However, the decisions concerning the type of life insurance policies, level of protection and the premiums are complex.
A good life insurance policy secures the future of your loved ones in your absence. So, your top priority should be a plan which protects them from any financial hardship in case of your demise or illness.
At the beginning of your career, when you are young and single, you may not have dependents to worry about. That is a time when a sum that could cover your financial liabilities, and perhaps additionally provide an old-age security to your parents, is more than enough.
After you start a family, your responsibilities multiply. It is always a wise idea to increase your life insurance cover at this stage to bring in that additional security for your spouse and children. You need to ensure that your family does not get unduly burdened to make ends meet and that they do not need to compromise on their quality of life in your absence.
Depending on your financial situation, life insurance can be used for a variety of purposes, such as: estate planning; accumulating cash, transferring wealth, and achieving estate tax liquidity.
A careful assessment is needed to determine the right policy so that you don’t end up paying more in premium for a policy that is also available for less. Keep in mind, though, that the younger and healthier you are, the less you will pay for coverage.
How much life insurance do you need?
One common rule of thumb is that protection should be about six to eight times your annual earnings, but there are a variety of factors to consider, such as: the size of your family; the number of people who are dependent on you and for how long; special needs such as mortgages, loans; children’s education expenses; and estate planning. Another key factor to consider is your spouse’s employment status and earning capacity now and in the future.
What type of life insurance should you buy?
There’s a key principle to determine what type of policy you need: Make sure it provides enough protection to meet your family’s needs if you aren’t there. When you consider buying life insurance, calculate what your family must have in terms of an absolute amount to see them through in your absence. Never lose sight of this number when buying a policy.
Life insurance is especially important for those who have debts or mortgages. It is also vital that you get adequate cover for immediate liabilities like your mortgage.
What types of life insurance policies are available?
There are two basic types of insurance policies:
1- Term life policies provide coverage for specific periods of time, sometimes as little as one year. While you usually can renew term life policies for one or more terms, even if your health has changed, there’s potentially a big risk here if you get sick during the term. If your health deteriorates, you probably won’t be able to buy another term without watching your premium skyrocket.
2-Cash-value life policies pay out upon the policy holder’s death, and also accumulate value during the policy holder’s lifetime. You can use the cash value as a tax-sheltered investment (the interest and earnings on the policy are not taxable), as a fund from which to borrow and as a means to pay policy premiums later in life. Or you can simply pass the benefits to your heirs. This type of insurance usually has a higher premium than term policies.
No matter which type of life insurance you go for, there’s no denying the fact that these policies are designed to protect your loved ones and help them through an otherwise difficult time of loss.