Life insurance induces negative thoughts and emotions in the minds of many. Such persons may have had terrible experiences with greedy sales representatives or perhaps do not fully understand the concept. Sometimes even those with misgivings about life insurance spend too much on it. One possible reason for this is that they always look to receive returns from the plan while they are alive.
You can judge “paying too much for life insurance” in a number of ways. The actual premium amount is the weakest method. In addition, you can assess at the opportunity cost of life insurance. The other method of judging whether you’re paying too much is by determining the value of life insurance in your financial plan.
When making purchases, you cannot always think of price or you may be “penny wise and pound foolish”. You have to assess the value you’re getting in return for your payment. This is the most important way of avoiding exceptionally burdensome premiums on life insurance.
1) Know how much insurance you need
In dealing with life insurance, it is best to ensure that your coverage amount matches your coverage need. To avoid over-insuring or even under-insuring your life, you must systematically determine your insurance needs by assessing your income and living expenses. Life insurance needs are calculated using three main variables; final expenses, the first year shortfall and the income replacement fund.
If you have coverage in place already, the coverage available is subtracted from the coverage needed. The calculation is represented in the following equation: Life insurance need = (Final expenses + First year shortfall + Income Replacement Fund)- Coverage available. Keep in mind that under-insuring yourself can force you to take out more insurance later on at unfavourable rates.
2) Choose the right plans
Your ability to afford should determine the type(s) of life insurance plan that is most suitable for you. The duration of your needs would determine whether the life insurance plan should be permanent or temporary. Catering for education needs for children in the event of your death should be a temporary need, while wishing to create and maintain an estate would require permanent insurance.
Universal Life and Whole Life plans are the major forms of permanent insurance while term insurance represents temporary insurance. Since term insurance is a lot cheaper, it can help ensure that you are fully covered within your budget. If you are underinsured and cannot afford more life insurance, then there is a good chance that you are spending too much on your current plan.
3) Evaluate life insurance in the context of financial planning
You may be fully covered and still spend too much on life insurance if you do not have sufficient medical and critical illness coverage. If you decided that you had $800.00 to spend on all insurance and invested $600.00 in a Universal Life plan and $200.00 on an annuity without medical or critical illness coverage, then you are not prepared for the risk of injury or illness whatsoever. If such may befall you, those plans may even be surrendered to fund the medical expenses.
4) Fix yourself first
Another major gaffe made in handling finances is insuring the lives of children without the parents being properly insured . Even if the parent or guardian is fully insured, life insurance is designed to protect one’s income. Having children medically insured is a great idea, but life insurance for the unemployed is a dim one, unless it’s used exclusively to cover final expenses. A situation where the child’s life is insured more the parent’s is ridiculous.
To summarise, you can avoid paying too much for life insurance by doing the following:
1. Check that you have adequate medical cover
2. Ensure that you have properly estimated the need
3. Make it a priority to balance the investment in life insurance with other aspects of the financial pyramid
4. Ensure that you have adequate coverage by utilising term plans where relevant.
Those who are approaching the age of retirement should evaluate their life insurance plan to see if it is still working for them and to determine its role in estate creation and maintenance.