How to buy your life insurance

16 September 2005

Gaurav Suri* tells you everything you wanted to know about life insurance but did not know who to ask.

There is an old joke about an insurance buyer's dilemma. A salesman was keen to sell life insurance to an old American farmer. But every time he went to the farm, the farmer kept stonewalling him. After repeated attempts, the young salesman finally asked the farmer, " But why don't you want to get yourself insured?" The old farmer's reply stumped the younger man. Looking the eager salesman in the eye he said, "Well son. The way I figure it, if I live, I don't get any money back. And, to get the money, I'd have to be dead first. Either ways, I lose."

But life insurance is is not about getting your money back; nor is it a savings instrument. Instead, it is a financial resource for your loved ones in the case of an unforeseen eventuality. You enter into a contract with an insurance company that promises to provide your beneficiaries a certain amount of money upon your death.

In return you make periodic payments called premiums. The size of the premium is generally based on factors such as your age, gender, medical history and the amount of life insurance you wish to have.

Some policies may require a medical examination before the premium amount is decided. Certain types of life insurance may also provide benefits for you and your family while you are still alive. Policies such as whole life or universal life accumulate the cash value on a tax-deferred basis, and that value can be used to supplement your retirement income or help provide for your child's education.

Given the uncertainties of daily living, life insurance becomes a useful part of everyone's financial portfolio. Financial advisors often recommend developing a financial plan that includes an appropriate amount of life insurance as part of a comprehensive strategy for financial security.