Not all life insurance policies were created equal.
Life insurance is often overlooked as an essential, but adequate life cover can secure the financial stability of your loved ones even after you have gone.
But not all life insurance policies are created equal. Choosing the right life insurance policy to suit your specific needs can not only ensure your loved ones are protected, but it can also save you money.
Life insurance categories
Let’s take a look at the different policies available, why they may be the most suited to your needs and how they can help you save you money.
Essentially, there are three categories of life insurance:
- Term-based life insurance (level term and decreasing term)
- Life assurance (over 50s plan and whole of life)
- Family income benefit.
Term-based life insurance involves paying a monthly premium and if you die during the term of the policy, a pay out is made to your beneficiaries. However, if the term of the policy ends before your death, no pay out is made and your investment is lost.
Life assurance policies on the other hand guarantee a pay-out, providing premium payments are kept up to date. Payments are made for the rest of your life and when you die your loved ones receive a lump sum pay out.
Generally speaking, term-based policies are cheaper than life assurance policies, due to a pay out not being guaranteed.
Whilst it is tempting to opt for a guaranteed pay out, if young and in good health, you could end up paying into the policy for so many years that the amount paid in exceeds that of the final pay out.
Family income benefit (or FIB) differs from the other two policy categories in that rather than offering a lump sum pay out, if you die during the term of your policy, pay outs of a predetermined amount are paid to your beneficiaries on a monthly basis.
This type of policy is ideal for covering the loss of a salary and aiding towards daily living costs to cover the financial void of your death.
Term-based life insurance
Choosing between term based cover or life assurance isn’t the only decision that needs to be made. Within each of these categories there are also subcategories that need to be evaluated.
There are two types of term-based life insurance; level term life insurance and decreasing term life insurance.
At the start of either policy, a pay out sum is determined. The difference between the two, however, is the value held by the pay out.
If you die during the term of a level based life insurance policy, your beneficiaries will receive the full pay out amount specified at the beginning of the policy. In other words, the pay out sum holds its value throughout the term.
The pay out sum of a decreasing term life insurance policy, on the other hand, does exactly that; decreases. This means that the further into your policy term you die, the smaller the amount your beneficiaries will receive.
Whilst this may seem unappealing at first, there is a place for a decreasing life insurance policy such as covering a repayment mortgage. In this instance, the pay out sum can be set to decrease in line with the remaining balance so that if you were to die, your loved ones are not left having to cover mortgage repayments.
Due to this decline in pay out sum, a decreasing term life insurance policy is cheaper compared to level term cover. But if you are looking to cover your funeral costs or leave an inheritance for your loved ones, it is highly likely that despite being slightly more expensive, level term cover is more appropriate.
Life assurance
As previously mentioned, life assurance policies involve making monthly premiums payments for the remainder of your life. These premiums are calculated based on the amount of cover you request.
In short, life insurance pays out if you die, whereas life assurance pays out when you die.
There are two types of life assurance policy; whole of life insurance and over 50s cover. In both instances, the pay out sum holds its value throughout the life of the policy.
Whole of life insurance can be taken out at any point in life but as mentioned earlier, if you live for a long time after starting the policy, it is possible to pay more in premiums than your beneficiaries will receive.
Due to this, it is not uncommon for this type of policy to be taken out by those in later life. Full medical information is required and your monthly premium payments take this into account.
An over 50s plan on the other hand, offers guaranteed acceptance for those between the ages 50-85 and doesn’t require you to disclose any information about your medical status. For this reason, if you are older and suffer medically, this type of cover would guarantee that your loved ones are covered should the worst happen to you.
Despite the age criteria, taking out an over 50s plan may still not be the best option. Due to not taking into account medical status, life insurance companies charge more for this type of policy to mitigate any unknown risk.
Therefore, even if you are over 50 but in good health, undergoing a full medical and opting for whole of life insurance is likely to benefit you as you can obtain the same level of cover at a much lower monthly cost.
Pick right and save money
The key to saving money on your life insurance is to choose the most appropriate type and level of cover to suit what it is you are looking to protect.
Choosing an over 50s plan to cover the remainder of your mortgage would not only result in higher monthly premiums due to the unknown medical risk but also due to the value held by the pay out sum.
Therefore, in this instance, the most cost-effective and suitable option would be a decreasing term based policy, providing the applicant was in good health.
With regards to level of cover, it can be tempting to secure the largest pay out sum available to you, but again, this higher level of cover will increase your monthly premium payments.
If you are only looking to cover the cost of your funeral, taking out a policy for £75,000 is likely to be unnecessary but will result in higher monthly premium payments.
It is important to determine exactly what it is you are looking to cover and only insure your life for that amount to avoid unnecessarily paying more.
Summary
Before deciding on a life insurance policy, there are a number of key things to consider:
- How essential is it that a pay out is guaranteed?
- Would you prefer your loved ones to receive a lump sum or ongoing monthly payments?
- What is it you are looking to cover?
- How long is left on your mortgage?
- How old are you / how long until retirement?
- Are you in good health?
Clearly answering all of these questions will allow you not only to get the most suitable policy, but it will also help save you money by not paying for cover you don’t require. Good luck.
Six Financial Tips When Buying Life Insurance
Are you looking to buy your first life insurance? If so, then you probably have a few questions on your mind, such as, “What kind of policy is best for me?,” “How much do I need for my policy?,” or “Which company should I buy from?”
Well, there’s no doubt that when you are buying life insurance for the first time, the experience can be both exciting, and a bit daunting.
In this article, we will discuss six essential tips that can help make the experience less stressful, by getting rid of all the frustrating false starts and other bumps in the road.
Know why you need it
Although most people will require life insurance at some point in their lives, you don’t need to buy a policy just because someone told you it’s a good idea. Life insurance policies are designed to provide families with financial security in case a parent or spouse dies.
Life insurance can help to pay for a college education, mortgage, contribute to fund retirement, help in estate planning, and even provide for some charitable bequests. Overall, in case your loved ones depend on your income for support, then life insurance is a great option for you.
Of course, if you don’t have them now but anticipate to have such needs in the future, you should consider buying a small starter policy. Why? The younger you are, the less expensive life insurance will be.
Find out how much coverage you need
Online calculators can be very helpful when determining the proper amount of life insurance. You may also get a ballpark figure using some formulas, the easiest being taking your annual salary and multiplying it by eight.
Alternatively, add the total monthly expenses your family will incur after your death, including ongoing expenses like school fees or mortgage payments. Divide the total by 0.07. You’ll want a lump sum amount that earns about 7% every year to pay for the ongoing expenses. Add this amount to any one-time expenses you need to cover, and the total will be a rough estimate of the amount of life insurance you need.
While these estimators and calculators can be helpful, they won’t give you any final answers. However, using these tools and learning as much as you can about how life insurance works will help you be more comfortable when it’s time to discuss your needs with a life insurance agent.
Check the quality of your provider
The life insurance policy will only be as good as the company backing it. You need to make sure that the company you choose is reputable, and can be relied on to be around for as long as you need the coverage.
Determine the right policy
There are two main options: permanent life, for a comprehensive coverage that often adds cash value, or term life, which has a more affordable premium. Nonetheless, there are still more options to explore.
Get professional help
A Los Angeles financial advisor is a good resource when it comes to insurance advice, and can help you factor in your needs, financial considerations, and your family needs.
Know the jargon
Insurance can be confusing, with some words like “dividend,” “premium,” “beneficiary,” and others.
Thanks to our friend and financial advisor in Los Angeles, Samuel Rad, for his insight on buying life insurance. Sam is a Certified Financial Planner in Los Angeles and has a wide range of knowledge about personal financial issues. He has helped many people meet their financial goals.