Term life insurance
There are two main types of life insurance...
Whole-of-life insurance
The older type, such as whole-of-life or endowment insurance, has a mix of insurance and investment. On death, your estate is paid the value of your life cover, together with the value of a number of somewhat confusing 'bonuses', e.g. 'reversionary bonuses' and 'terminal bonuses'. These policies have the advantage that their premiums remain constant for the life of the policy, but they are a costly way to buy life insurance.
Today, few advisers recommend whole-of-life insurance, owing to its lack of flexibility. Costs are sometimes unclear and in some instances may be high - partly because the various components of life insurance, investment, and administration cannot be separated out. As an investment, you cannot easily evaluate a whole-of-life policy, and you also have no control over the investment strategy.
You may also have encountered a variant, called 'endowment insurance'. This is like whole-of-life in many ways, but there is very little life cover, and it matures on a fixed date. It was very popular up to the 1970s and 1980s as one of the few long-term savings options available to New Zealanders.
However, in recent years, the growing number of flexible, low-cost personal superannuation products have become the preferred alternative.
If you already have a whole-of-life or endowment life insurance policy, depending on how long you have had the life insurance, you may be better off retaining it in some form. You should discuss this with your financial adviser or life agent.
Term
The other main type of life insurance is called 'term' or 'temporary' life insurance. It has no cash value, and remains in effect only for as long as you continue to pay the premiums - this is why it is called 'temporary.'
Because there is no investment component (only death cover), these policies also tend to be cheaper. However, you will pay more each year as you get older, and men may also pay more than women, as they are more likely to die younger. There is also a 'deadline' age, after which the policy can no longer be renewed.
There are many variations of this type of insurance available, so it pays to talk to an insurance expert about which is right for you.
Because you are covered only for as long as you pay the premiums, it is very important that you do so. If you forget, and lose your cover, you may not be able to get it back - or only if you pay a substantially higher premium. This is because the life insurance company will want to assess whether you are now a higher risk before reinsuring you: if they think this is the case, they may require you to undergo some tests.
How much cover do you need?
Insurance brokers have their own systems to help work this out, and the basic process is really quite simple. The first stage is to establish what lump sum you would like your survivors to receive. This is likely to be a function of many things, e.g. are there debts and mortgages you would like repaid? what about funeral costs and estate settlement costs?
Ask yourself if you want an investment pool available to generate income for a surviving spouse or partner - and, if so, how large should it be? In general, this can be worked out by estimating household expenditure, then subtracting the level of income you expect the surviving spouse to be able to earn. A good rule of thumb is to assume that your spouse or partner will need 75% of the combined income you were receiving prior to your death.
Also, how long would your spouse or partner need the money to last? Adding these two amounts gives you the total lump sum that needs to be available on your death. Next, what assets will be available that could be cashed in? These could be term deposits or other readily saleable assets. The difference between these two amounts is the amount that needs to be funded by life insurance.
Cancelling policies
If you have an life insurance policy and wish to cancel it so you can take out another policy, there is one golden rule to remember - do not cancel until you have a replacement in place!
This is because your health may have changed for the worse since you took out the original policy, which may make it more expensive, difficult or even impossible to obtain replacement cover. If this were the case, and you had retained the old life insurance policy, you could always go back to it - but it's too late once you've cancelled!
You should also get a financial adviser or broker to look at the net benefits of any change. These may not make the change worthwhile. For example, if you have had a whole-of-life policy for some years, you may be better off having it 'converted' to an endowment policy. This is generally because you will have paid most of the costs in the first few years.
Note: the comments in this article are general in nature, and should be treated merely as a guide. They should not be relied on in making financial judgments. The advice of a professional should always be sought.
Source : http://www.inform.co.nz/term-life-insurance/