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ONE of the biggest
mistakes people make is to rush into financial decisions without
considering what is really im-portant to them.
Because many are caught up in the
responsibilities of daily lives, time for reflection often never
happens. And when the unexpected happens, they don't know what to
do and whom to turn to.
Insurance is probably the least monitored
area of personal finance. Most people are also overwhelmed by the
jargon in the sector and as a result, they get the wrong insurance
from wrong agents, pay more than necessary for their policies and
get insured through companies with poor reputation for servicing
customers.
Because you do not want to deal with
money problems when coping with life's "catastrophes"
such as death, disability and illness— you must take care of
insurance well before you need it. Here are some practical pointers,
understand before buying insurance:
1. Buy
from stable companies. Insurance
companies can fail like any other companies and there is a number
of organizations (Moody's, Standard & Poor's etc.) which evaluate
and rate the financial stability of insurance companies by using
a letter-grade system just the way they do in primary schools (where
A is better than B or C).
Do your research and find out which
of these companies have high ratings. Choosing among the top five
or 10 is a wise move because most of these companies have also long-time
foreign partners.
2. Buy
only from a full-time, licensed career agent. The
average agent is not the person you should listen to when you buy
a life insurance. Your interests and his interests are contradictory.
He is definitely not a trained financial adviser but a salesman.
Besides, he could only be working part-time and will most likely
dedicate a portion of his time developing his career and attending
to your needs.
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3.
Buy to replace of loss of income.
The main purpose of having a life insurance is to provide a lump-sum
payment that replaces the deceased person's income. If you are still
in your younger years and have a growing family or years of child
rearing ahead, your most valuable asset is probably your future
earnings. And how would your family manage financially if you died
unprepared? Having a life insurance can therefore fill the financial
void left by your death.
4. Buy
to minimize estate tax. The moment
you die, your assets immediately go to your estate. The government
then takes a big portion of your estate in the form of taxes. Without
estate planning, your family will have to pay the taxes due and
this could be a financial burden to them.
Estate planning is the process of
preparing what is to happen to your assets after you die. You are
insuring that after you die, everything will be taken care of as
you wish and that taxes will be minimized. Buying a life insurance
is therefore an effective estate planning tool. However, if your
intention is to leave your assets or money to your children, grandchildren
or a charity, why not start giving while you are still alive so
you can enjoy the act?
By giving some of your assets away
while you are still alive, you reduce your estate and the taxes
owed on it.
5. Buy
to eliminate debts after you die.
If you are a business owner with major financial commitments such
as mortgages and bank loans, a Mortgage Redemption Insurance will
eliminate all the debts you owe after you die. This will leave your
assets free from liens and encumbrances for your family to use and
enjoy.
6. Buy
to provide income protection.
Life insurance with a disability rider replaces your income if you
suffer disability. If you have an occupation that exposes you to
various risks (accidents, illnesses, etc.)— you would therefore
need enough disability coverage to provide you with sufficient living
allowance to live on until other financial resources are available.
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7.
Buy only the amount you need.
A very simple way to determine the amount of life insurance to buy
is to think how much your family will need to maintain an acceptable
standard of living after you die. You can determine it by using
this simple formula: (Total monthly expenses x 12 then divide the
figure by the average time deposit rate). Then, figure out the amount
you will need to pay major debts, taxes and other financial obligations
which you don't want your family to shoulder after you die.
The sum of these figures will more
or less give you a rough estimate of how much insurance you will
need to buy. If the amount runs up a little high on your budget,
you can actually reduce your coverage or gradually start building
up the adequate coverage you will need in the future. Ask your agent
to help you with these concerns.
8. Buy
what is reasonably affordable.
A good insurance policy can seem a little expensive but it is relatively
small compared to the total loss. Policies that cost little also
cover little that's why they are priced low because they aren't
covering large potential losses.
There are several policies available
for you to choose from at reasonable rates and your agent shall
be able to help you these.
9. Buy
while still healthy and young.
The price of insurance is cheaper when you are healthy and young.
By the time you grow old, the cost of insurance will be more expensive
because of various risk factors (death, accidents, illnesses, etc.).
Don't be like others who rush to buy
insurance during the later years of their lives because they are
afraid death is just lurking around the comer. If you are still
young and healthy, now is the time to shop around for insurance.
10. Buy
because you love your family.
Generally, if you're married, you'll want to name your spouse as
your primary beneficiary and your children as your secondary beneficiaries.
And if you're single, you may want to name your siblings first,
your parents next and in some cases, one of your relatives. As a
rule, your primary beneficiaries should be people close to you with
the greatest financial need— your family.
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