Life insurance: why you need it and how to choose it


Even if you are not a stuntman, do not engage in extreme sports and do not risk your head every day, take a closer look at life insurance programs. By insuring your life, you can save up for planned expenses like a wedding or a down payment on a mortgage, or provide yourself with an increase in your pension.

What can be the benefits of life insurance?

In addition to the original goal-to provide a safety cushion for your loved ones in case something happens to you – life insurance has other options:

  • save up for planned expenses — for example, for teaching children at a university;
  • save up for a pension increase.

How to choose an insurance program?

Insurance programs are different, you can distinguish 4 types (specific conditions for each type can be clarified with the insurer):

1. Term life insurance

In its pure form, risky life insurance implies a single insured event — death. In this case, the insured person makes one contribution or pays them regularly — everything depends on the contract. When an insurance event occurs, the money is received by his relatives.

Risky life insurance often becomes the basis for so-called mixed insurance, in which you receive a payment even if you are ill or injured. No savings are made.

In such a mixed insurance, you can choose your own:

  • payment amount;
  • list of possible adverse events (disability, injuries, deadly diseases);
  • term-from one year to 20 years or more.

The amount of contributions is calculated by the representative of the insurance company. It depends on the company’s tariffs and other factors (for example, the amount of payments)..

Another special case of risk insurance is credit insurance. In this case, if the bank is listed as the beneficiary, the payment will not be received by you, but by the bank where you took out the loan. If something happens to you, your family will not have to pay for you.

2. Cumulative insurance

A combination of insurance and savings. In a classic savings insurance has a fixed rate of return. However, the possible income will be lower than with investment insurance.Once you have entered into a contract, you can have both options or one of the two:

  • the insured event has occurred — your beneficiaries (that is, those whom you specify in the contract) will receive a payment (for the risk of “passing away”);
  • before the end of the contract, nothing happened to you — you receive your savings (for the risk of “surviving” or “living up to a certain event”)..

That is, you can save money for something important for 10 years, and all this time your life will be insured. You can choose the amount of contributions and payments yourself. Term-from 5 to 20 years or more. You can conclude a contract for a shorter period than 5 years, but in this case the yield will be low, and the tariffs, on the contrary, are high.

3. Voluntary pension insurance

The voluntary pension insurance program is similar to funded insurance. The first difference is that an “important event” is reaching retirement age, and the second is that you can choose a period during which you (or someone else you have chosen) will receive an additional pension. Otherwise, everything is the same: choose the size of the pension and pay regular contributions.. 

Pension Insurance Options:

Lifetime pension

You choose the period from which you will start receiving an additional pension. If something happens to you, the accumulated balance of the pension will not “burn out”, but will be paid to the “beneficiary” – the one you appoint: a husband, wife or other next of kin.

Fixed-term pension

You specify a certain period when you want to receive an additional pension (for example, from 65 to 70 years).

What can be additional conditions of pension insurance?

  • Contributions can be exempted from payment upon the occurrence of disability of the 1st and 2nd groups. In this case, additional monthly payments may be assigned.
  • Accident insurance (one-time insurance payments in case of injury, death and disability only as a result of an accident).
  • Additional conditions are not provided by default, but must be specified separately in the contract.

4. Investment insurance

In this case, you allow the insurance company to dispose of your money. Savings are divided into two parts:

  • the guarantee part will provide a refund of your money if the situation in the stock market is unfavorable;
  • the investment part can provide additional income.

Not all the capital generated by your contributions can be protected from an unfavorable market situation — so read the terms of the agreement carefully.

Investment risks

You can choose one of the investment programs that the insurer will offer you. Each insurance company chooses independently what exactly will be included in the investment portfolio, usually creating several offers for different strategies:

  • aggressive — with the probability of more income, but also greater risks;
  • conservative — in which the risks of losing money are lower, but the likely profit is less.

When you invest in investment insurance, you get a tax deduction from the contribution. However, keep in mind that contributions and investment income are not insured, unlike deposits in a bank. If the insurance company goes bankrupt, you may lose all your money. Therefore, you need to take a very responsible approach to choosing an insurer.

Additional advantages of life insurance:

Payments for risky events are not taxed. Income tax on “survival” payments is levied only on the difference between the amount of payment and the amount of contributions, minus the amount of the refinancing rate.

  • Tax deduction. You can apply to the tax authorities with an application and return the tax deduction in the amount of insurance premiums paid for the tax period (but not more than the listed personal income tax) under voluntary life insurance contracts for a period of 5 years or longer.
  • Targeting. Insurance payments in the event of death are not included in the inheritance — only the person you specified will receive them. This is taking care of the most vulnerable members of the family — you can protect, for example, grandchildren or children from the first marriage.
  • Special status of the policy. Insurance policies are not property, so they cannot be subject to foreclosure by third parties. They can not be confiscated, arrested or, for example, divided in a divorce.

Always read the insurance contract to the end, carefully study the insurance rules, ask questions to the insurer. Find out what an insurance event is in a specific contract (if you are engaged in extreme sports, specify whether your insurance takes into account the risks associated with them).

If you terminate the contract early, you risk losing some or all of your contributions — for example, if you terminate the contract in the first year of its validity. Therefore, pay attention to the procedure for determining the amount of the redemption amount under your contract.

Money grow

Please also pay attention to:

  • term of the insurance contract;
  • amounts of insurance premiums;
  • frequency of payment of contributions;
  • distribution of the risk and accumulative part in insurance;
  • the list of exceptions to insurance;
  • grounds for refusal to pay insurance;
  • conditions for early termination of the contract (including the procedure for determining the amount of the redemption amount).

Do not hide information about your health status (especially about the presence of chronic or deadly diseases) — if it turns out that you have withheld important information, the insurance company may invalidate the contract and will not pay anything.

Alexander Bennett

Verified by Alexander Bennett is a renowned financial expert with over 20 years of experience in the field.

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