We will be having a closer look at what is group term insurance, understand its place in the employee benefits program and also examine how to determine how much group term insurance to buy.
What is Life Insurance?
Life insurance protects families when there is an early death of the income provider.
Main Considerations for Buying Life Insurance
The 3 key questions:
- Does the person require life insurance?
- How much life insurance does he or she needs?
- What kind of life insurance should he or she have?
The reasons for buying life insurance are
- Provide for spouse and children
- Support aging parents
- Protect business partners and employees.
Theory of Decreasing Responsibility
According to the theory of decreasing responsibility, Breadwinners of young families have the most responsibility to their children and spouses, but as children grow older, these financial responsibilities decrease. The need for life insurance peaks along with these family responsibilities.
For a younger person, less time has passed to accrue savings and wealth, and the likelihood of having large debts, such as a mortgage payment, is higher than for older people. To responsibly protect loved ones, it is important to have a life insurance policy at this crucial time when the death of the primary earner in the family would have serious consequences. As the family ages, the need for this type of insurance lessens as personal wealth and resources typically increase.
According to this theory, term life insurance is the best form of life insurance for covering a policyholder’s responsibilities, as it combines a low cost with a high amount of coverage.
When the policyholder pays off his or her debts and is capable of providing for a family with investments (such as retirement accounts or stocks),he or she can cancel the policy.
STAGES IN LIFE CYCLE
|Single, with little financial obligations||No need for life insurance|
|Young, in good health, plan to start a family and start a family|
|Married, with young children, mortgage and debt||Loss of income will be devastating|
|Single, with siblings, older parents or grandparents to support||Loss of income will be devasting|
|Married, grown children, mortgage paid, lower debts||Retirement income needed|
|Youngest child is 23 years, mortgage and debt is paid off, enough in savings and retirement||No need for life insurance|
Difference Between Permanent and Term Insurance
|Also known as whole life, universal life, variable life and so on.|
|Combines life insurance with a savings component that builds cash value.||Provide protection for a pre-specified period of time – Good to cover temporary needs.|
|Premiums are generally quite high||Term life insurance premiums are less expensive than whole premiums. However premiums increase with age.|
|Lifelong coverage – It provides coverage or protection for as long as you pay the premiums.||Provides coverage or protection for a specified number of years and then expires. The individual may need to take another physical/medical examination to re-qualify|
Determining Which Life Insurance to Buy
There are 2 main considerations:
- How long will the individual need the insurance?
- How much money do you have in your budget for this expense?
Here we are not interested in buying universal life insurance nor decreasing term life insurance.
Universal Life Insurance
This is a new type of life insurance policy. It combines life protection and investment component. It is riskier than permanent and term life insurance because of the investment component.
Decreasing Term Life Insurance
A decreasing term life insurance is a term life insurance that pays a lump sum should the insured meet with death, total permanent disability (TPD) and in certain cases critical Illness.
You will need to pay a fixed rate of premium payment for the limited duration that you and the insurer decide to insure against.
The unique thing about a decreasing term compare to a level term is that the sum that you are insured for decreases over time. Decreasing term works well here because the risk that you are trying to insure here decreases like the sum assured.
Premiums for decreasing term insurance tends to be lower than that of a level term.
Determining How Much Term Insurance Does An Individual Needs
If you are an individual deciding to buy your own life insurance policy, the amount of insurance protection that you will need is given by the formula (the family’s needs) less (resources already in place to meet those needs).
The formula is “Short-term needs + long-term needs – resources = how much life insurance you need”
An example is (current & future financial obligations) less (spouse’s income; any savings, investments and other life insurance policy that you have already own). This is a needs analysis method.
|CURRENT & FUTURE FINANCIAL OBLIGATIONS||
EXAMPLES OF FAMILY NEEDS
|Ongoing Expenses(This means providing money for the deceased’s family to live on for a specific period of time. It helps to pay for everyday living expenses)||
Declining health or a dangerous job or hobby can significantly increase the cost of insurance (premiums)
Visit this web site to calculate the amount of life insurance that an individual would require: http://www.term-life-online.com/term-life-insurance-calculator.html
This section will lay the foundation in appreciating part 2 of this article.
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