Nobody wants tragedy or loss to strike one's life and loved ones. And yet it happens in the most unexpected time. Which makes preparing for it all the more important. Despite all the efforts of planning and knowing our expenses and building up an emergency fund (see here), a family's finances may still not be able to take on the pressure if a breadwinner is suddenly unable to earn income because of death or disability. That's why having an insurance for accident and life is a very important component of personal/family financial planning.Here are some pointers to consider in taking out an accident or life insurance:
1. An insurance policy should allow you or your loved ones to get money years after you have entered into a contract with the insurance company. Obviously, stability and strength of the insurance company is of primary concern. Understandably, people are wary of handing over their hard-earned money for several years only to find out that their insurance company, even the reputable ones, are in the red several years later, as what have happened in the recent financial crisis. And yet, not taking out an insurance on that basis is even more unwise. One way to spread the risk is taking out insurance coverage from more than one company, say, two separate contracts that pays 1M proceeds each, if you intend to be covered for 2M. Of course, that may jack up the premiums you may need to pay, which you should also consider.
2. How much insurance payout is enough? Ideally, the proceeds of the insurance should allow a family to pay off any debts it has, basically starting on a clean slate. It should also tide it over for several months of limited income while other members of the family try to find regular livelihood to replace the one that was lost.
3. Keep insurance premiums low by availing of "plain vanilla" insurance. There are insurance policies that include additional "benefits" that you would hardly use. For example, would you really avail of a loan window that has an interest rate higher than the prevailing?
4. Avoid paying yearly premiums in several installments, as you will pay more in total that way. As much as possible, pay in one or two installments per year, instead of monthly or quarterly. You will probably not earn enough (in interest, for example) for the money that you didn't pay immediately compared to the discount that you will get for paying ahead in the year.
5. Compare the total premiums you will pay. Some insurance have the option of paying for a certain number of years, with the remaining years "self-liquidating" from dividends being earned from the premiums. That sounds nice, but you still need to check if an option to pay for the full duration of the policy will result in shelling out less money overall.
6. An insurance, especially a life insurance, is intended to benefit those that you will have left behind. Make sure that the beneficiaries are aware of the insurance you took, and the benefits that they can have if the unfortunate should happen. Provide them instructions on how to claim benefits, telephone numbers and insurance agents to call, forms needed, etc.
In case of accident insurance, the same applies, as you may be unavailable to arrange for these matters should the accident turns out to be serious.
With these info, hopefully you can get for yourself and your loved ones an economical yet effective tool for protecting your finances.
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