Insurance is one of the crucial support systems of personal finance management. An insurance policy provides the nominees with a compensatory relief, considerably monetary relief, when in need. For instance, a health insurance holder is entitled to financial aid to pay off the medical bills.
Likewise, there can be several other situations when a policyholder may seek financial help and insurance cover comes to rescue. The help received and the situations, however, ambiguously vary, which is why making the right decision when buying an insurance policy can help ensure financial security for future needs.
If you’re already struggling with these issues and cannot make the right decision, this article is for you. Here we have 10 things that you should consider when buying an insurance policy.
1. Consider Your Finances
The very first thing that you must consider is your own financial status. Consider your annual family income, against your yearly expenses. Besides, a substantial portion of your income should also be diverted towards your personal savings. After making all of these arrangements and evaluating all your necessary expenses how much you’re left behind will decide the type of insurance cover and the premium you’ll need to pay.
2. Include Your Debts
An important part of your financial management plan is the amount of money you owe as debts. Notably, outstanding loans and utility bills are inseparably considered as debts by the financial institutions. And missing out on these payments can significantly affect your credit score. And subsequently, your insurance cover and premium value.
3. Know the Difference Between a Premium and a Claim
The premium that you pay over the years and the claim that you receive at the end of the term do not add up top-notch. You’ll find that there’s always a small gap between these two values. Essentially, this gap or the difference is the insurer’s profit. It is vital that you know this difference and accordingly buy a plan that suits your needs.
4. Know the Key Roles in a Policy
Typically, every insurance policy has four major key players or roles- insurer, which is the insurance company; policy holder, which is the owner of the insurance policy; the insured, which is the item or the person who is insured; and lastly, the beneficiary, which is the person who receives the benefits after a claim. The total value of the policy and the premium to be paid depends on the age and health of these key players, about which you shall learn some more a little later.
5. Consider an Insurance Policy as an Investment
There are differences in opinion regarding whether an insurance policy should be considered as an investment or not. In most cases, where the returns are guaranteed, these policies should be considered as an investment. And like any other investment, expecting good returns should be prioritized when buying the policy.
6. What Is the Term of the Policy
Another crucial point to be considered when buying an insurance policy is the term through which it is valid. Well, if you consider life insurance policies, you’ll find both- term life insurance, as well as, permanent life insurance policies in the market. Depending upon your needs and your financial capacity, you can choose, either. Just make sure that you compare the benefits thoroughly before buying. And this applies, generally to all items that can be insured. And surprisingly there’s hardly anything that cannot be insured today.
7. Age, Health, and Conditions Apply to the Cost of a Premium
As already mentioned, the age and health of the owner and the beneficiary affect the cost of the policy and the premium to be paid. It is noteworthy that more than the beneficiary, it is the condition of the insured or the owner (in most cases, they are the same), that has more influence. For instance, if a life insurance policy holder has pre-existing medical conditions, the premiums are more likely to be higher. Similarly, if the insured is aged above 50 or is close to the retirement age, the premium would be higher. The reason for this difference is the higher potential for a claim being filed by such policy holders. It would eventually mean that the insurer will have to make the payments in the end.
8. What Things Should Be Included in a Policy?
Although, there is hardly anything that cannot be insured these days, it is still recommended not to buy an insurance policy just because you can. The items or the life which is being insured should be considered carefully. When it comes to life insurance, it is pretty obvious that life is worth more than death. But the same is not true with other belongings. For instance, when buying a car insurance, although it is mandatory by law, it should still be evaluated whether buying an insurance cover is worth it, since the car is depreciating in value every year.
9. Determining the Cost of the Policy
Most importantly, you should be able to determine the cost of the insurance policy that you can afford, and that you need. For example, use a generic formula for evaluating the insurance cover on your car. Typically, a car depreciates by 5% in value each year, given that it does not meet any unfortunate crash. If your car is 5 years old, and was worth $2000, brand new, its current value should stand around, $1500.
Original value – Depreciation (P*R*T/100) = Current value
2000 – (2000*5*5/100) = 1500
Once you have this value with you, it would be easier to compare the premium versus the depreciated value. Of course, when the depreciation starts to overrule the premium cost, it is no longer worth buying the policy. The same way, you can determine the cost of your insurance policy and compare if you should buy a new one or not. Two insurance companies that TruStage works with for auto insurance are Esurance (Allstate company) and Liberty Mutual. With this in mind, if you are considering switching to a different insurance policy or provider, you can find a wide range of helpful reviews online using websites such as Truly Insurance, for example.
10. Evaluating the Perks and Performance
Although the primary purpose of an insurance policy is to secure anything against its financial value, there are other perks also. For example, an estate policy can offer interim returns on investment primarily by dividing the profits in fundraisers for the insurer. Similarly, there are extended life care facilities, third party liabilities and alike features available with different insurance policies. It is always best to consider these perks as well when buying an insurance policy.
Whether you’re buying a new policy or getting your old one renewed, the aforementioned points can help you determine if you’re making the right choice.