Nafis Akhter Ahmed
When you buy life insurance, you enter into a contract with an insurance company that promises to provide your beneficiaries with a certain amount of money upon your death. In return, you make periodic payments, called premiums. The premium amount is based on factors such as your age, gender, medical history, and the value amount of life insurance you purchase.
In the event of your passing, life insurance provides money directly to your beneficiaries. Hence, life insurance is a form of financial planning. Your beneficiaries can use the money for:
Certain types of life insurance may provide benefits for you and your family while you are still living. For example, permanent life insurance offers a cash value component, which can be put to good use during your lifetime. However, as there are different types of life insurance, there are also different insurance quotes.
There are three main categories of life insurance
Life insurance can be of many varieties. For the sake of easy understanding, here we divide them into three broad categories:
Term Life Insurance: A Term Life Insurance is for a certain period of time. This period can be from one year to twenty years in length. The terms and conditions of this type of insurance are the easiest. Only the death of the insured (the person on whose life the insurance is bought) will entitle the nominee to receive promised payments from the insurance company. Policy will stop if the policyholder stops paying premiums. Since this type of policy doesn’t have any ‘cash value,’ the encashment opportunity is not available by surrendering the policy before maturity of the policy. There is no other financial benefit on the maturity either. Due to the absence of financial benefits on maturity, the premium for this type of insurance is comparatively very low.
This type of insurance is suitable for the ones with limited or low capability of premium payments but having insurable risks. For example, you have a home loan and you do not have the capability of buying an expensive policy. But, your family will have to bear the burden of the loan repayment in case of your absence due to some undesirable incident. It is advisable to buy a Term Life Insurance to relieve your heirs from this liability.
Permanent Life Insurance: This type of insurance policy provides insurance security for the whole life of the insured. The policyholder has to pay premium either for a specific period of time (usually ten to twenty years) or, in some cases, throughout the whole life. The goal of this kind of insurance is to provide insurance benefits to the nominee of the policyholder in case of his/her death. Due to availability of Cash Value with this type of insurance, a Surrender Value can be obtained by surrendering the policy after a certain period (usually two years). Within initial years of purchasing the insurance policy, it is normal for the Surrender Value to be much lower than the amount paid as premiums (more discussions to follow in this regard).
Apart from death claims, different insurance companies can provide different benefits under this kind of insurance policies. One of these benefits is regular pension. The pension begins after a certain period of purchasing the policy. Suppose, you are forty years old now and want to buy an Permanent Life Insurance policy under which you can keep paying premiums until you can keep earning – up to sixty years of your age. After the period of paying premiums, that is after the age of sixty, you start receiving payments as pensions. Such pensions can be received monthly, quarterly, semiannually or annually. Besides pension, your nominated person will receive money as insurance claims in case of your death.
Endowment Life Insurance: In simple words, Endowment Life Insurance is a mix of Term Life Insurance and Permanent Life Insurance. There is a specific period like Term Life Insurance. On the other hand, there is Cash Value and Surrender Value as in Permanent Life Insurance. At the end of specific term, you will receive one-time cash payment as maturity value. Usually this kind of insurance policy is available for ten to twenty five years. Due to availability of one-time cash after the fixed term, beside insurable risk coverage, this type of policy is quite popular in Bangladesh.
How Much Life Insurance Do I Need?
Your goal should be to develop a life insurance plan (through one or more policies) that, following your death, compensates for the loss of your economic contribution. Here are two ways to determine how much life insurance you may need.
Calculate the replacement income need. This is a well-established method to determine the financial contribution you can expect to make to your family from now until you would retire. It’s more than just replacing your income, as it takes into account everything you provide for your family, including:
Survivor needs analysis. This approach is based on replacing an amount of income needed for your surviving spouse and children to maintain a desired level of income and lifestyle. Your survivors’ needs are then compared to their assets, existing life insurance and income sources to determine any additional life insurance requirements. An insurance professional or financial advisor can help you determine an accurate figure and choose appropriate coverage.
It’s never too early to start thinking about life insurance – start the financial planning you and your family need and deserve. Consulting an advisor can give you an overview as well as personalised insurance quotes.
This article is written for general information purposes only. The information contained does not constitute legal, financial, purchasing, and/or investment advice and neither does it make any recommendation or endorsement regarding the companies and/or services mentioned herein. Although care has been taken to ensure information accuracy in this article, MetLife, Bangladesh does not warrant or represent, expressly or impliedly as to the accuracy or completeness of the information herein and in no event shall MetLife, Bangladesh be liable to the reader or to anyone else for any claim, howsoever arising, out of or in relation to this article. All applicable laws, regulations, and current MetLife, Bangladesh rules should be referred to in conjunction with this article.
This article was published on September 30, 2016 in The Independent