04 Feb What Makes a Good Life Insurance Policy?

With so many life insurers and types of life insurance available, it can be difficult to discern what makes a good policy and the insurance you should invest in. A good life insurance policy is like good food: it’s about what you want and need — the heart of life insurance.

The components of a good life insurance policy depend on the sort of coverage you need, how long you need it for and how you would like your benefit to be paid out.

In this post, we’ll explore how whose life you’re covering and what you would like your life insurance to do influences what makes a good policy, how to choose a policy, and who can help you compare policies.

An Overview of How Life Insurance Works

Life insurance is designed to ensure your dependents, such as your children or spouse, are taken care of in the event of your death. After you choose a policy, you’ll pay your insurer a certain amount every month, called a premium. Your premium all adds up to form a benefit, the money your beneficiaries (dependants) receive after you die.

How to Choose the Best Life Insurance Policy

Let’s explore the types of life insurance policies available. When discussing each policy, we’ll outline what’s typically included in a policy, who it’s for, and what it does. Then, we’ll compare the policies so you can decide which is best for you.

Term vs. Permanent Life Insurance

There are two dominant policy types: term and permanent. Term life insurance provides coverage for a specified period and permanent life insurance provides coverage until you die. Whether your insurance is term or permanent, among other specifics, are some of the factors that influence your premium.

Term Life Insurance

When you take out term life insurance, your policy is only paid out if you die within the term you take out life insurance for. Once the term expires, you can either renew it for another term, possibly convert it to permanent coverage, or allow the term life insurance policy to lapse.

There are six types of term life insurance: level, increasing, decreasing, renewable, and convertible. Generally, premiums increase as you get older, since you’re statistically more likely to die.

Who Is Term Life Insurance For?

People who would like coverage for a certain term, such as 20 years, should buy term life insurance. This is because term life insurance offers a low premium with a high payout. It’s ideal for people with growing families who only need life insurance until their children are self-sufficient.

For instance: George is 30 years old. His wife is pregnant with their second child. He decides to take out term life insurance for thirty years. He pays a premium of R2,000 per month with a payout of R2,000,000.

If George dies before his term has passed, his dependents don’t receive any payout. If he dies before he turns 60, his children receive the death benefit. This can be used to pay school fees, replace George’s income, or pay for the family’s mortgage.

Types of Term Life Insurance

The most common type of term life insurance is level term. This provides a fixed benefit throughout the policy term with fixed premiums.

Some people opt for increasing term coverage, which increases their payout over the years, to combat the effects of inflation.

People who buy houses typically take out decreasing term coverage with their bond. Their payout and premium decrease over time, as mortgages decrease as you pay them off. This sort of insurance is designed to pay off a mortgage in the event of the bond owner’s death.

If you would like to renew your life insurance after the policy period expires, opt for renewable term life insurance. Or, if you want the option to convert your term life insurance to permanent life insurance, choose convertible term insurance.

The last kind of term life insurance is called return of premium (RoP) life insurance. This insurance returns your premium after you’ve finished paying it, often with interest.

Permanent Life Insurance

Permanent life insurance doesn’t have a policy expiration date. You’ll keep paying paying premiums until you die. Just as with term life insurance, users pay a premium (usually higher than that of term life insurance).

Life insurance splits the premium you pay into three categories: the death benefit, covering the insurer’s costs, and the cash component. The death benefit is only paid out upon your death, whereas you can access your cash component at any time by withdrawing it, investing it, or taking out a loan against it. If you die without using the cash component, it’s returned to the insurer (in some cases it can be added to the death benefit, though at a cost).

Who Is Permanent Life Insurance For?

Permanent life insurance is designed for people with dependents or large debts they don’t want their family to inherit. Often, permanent life insurance comes with a cash component, sort of like a savings account in addition to the death benefit.

For example: Steven’s wife, Mary, doesn’t work. She and Steve’s children are totally reliant on his income to pay for their living expenses and lifestyle. When Steven dies, his wife and children will receive his death benefit and can use it to replace his income.

Types of Permanent Life Insurance

There are three types of permanent life insurance policies: whole, universal, and variable.

Whole Life Insurance

Under whole life insurance, your cover and premiums will remain the same throughout your life. The policy includes a cash benefit alongside the death benefit.

Universal Life Insurance

Universal life insurance premiums and policies are changeable. Some policies offer the option of adding your cash benefit to your death benefit. The cash benefit grows based on interest rates and investment performance.

Variable Life Insurance

Variable life insurance has fixed premiums. Its cash value is invested into subaccounts, such as mutual funds. The cash value’s growth and performance depend on the subaccounts’ performance.

The best policy for you depends on your risk tolerance. If you’re risk-tolerant, choose universal life or variable life insurance. Otherwise, go for whole life insurance.

The Best Policy for You

As you’ve read, there are various sorts of life insurance policies. You can choose to be insured for as little as one year or the rest of your life. You can invest with your life insurance, only insure your house, or choose an insurance with flexible or fixed coverage. In the end, “good life insurance” is subjective.

Credit Boost can help you compare different policies aligned with what you want from coverage. We’ll assist you in finding insurance with an affordable premium that fits your risk tolerance and term needs. To learn more, contact us today.