One of the very first decisions you must make when arranging life insurance is what type of policy should you choose – term insurance or whole life. Consider the following checklist to see which type might suit you best:
Reasons For Choosing Term Cover
1. Budget for premiums. If your budget for premiums is small, you will probably need to opt for term insurance as the premiums for similar amounts of cover are much lower.
2. Amount of cover. Similar to the above point, if you require a large amount of cover (perhaps because of dependant children) then you will probably need to take advantage of the lower premium levels.
3. Age. If you are young, you will find that the premiums for term cover are very low. It might be possible to arrange term insurance for the whole time that you require life insurance for (e.g. the time during which you have dependant children in education).
4. Investments. If you take care of your investment needs by investing in the stock market or other forms of saving/investment then you will probably have no need for a life insurance policy with an investment component.
Reasons for Choosing Whole Life Cover
1. Insurance period. If you can see that you will require cover for an extended period then whole of life cover can be a better solution. This will avoid the possibility of a health problem dramatically increasing your premiums or rendering you unable to get insurance.
2. Investment choices. If you want the simplicity of having both your insurance and a substantial part of your investment in the same policy then whole life is best for you. Once the policy has built up an investment value (in its later years) you can even borrow against its value, therefore meaning that you don’t have to die to benefit from your policy.
Tags: Life Insurance, term life insurance, whole life insurance
The benefits of whole life insurance are that you are guaranteed to get a payout from it, no matter how long you live. The major disadvantage is that premiums are many times more expensive than for an equivalent amount of term life insurance.
Why is Whole Life Insurance More Expensive?
This type of insurance is initially more expensive than term cover because the company providing the insurance know that they are going to have to pay out the insured sum in all cases (as long as premiums are payed). This contrasts with term cover where the policy will only pay out if you die within the specified period. Don’t forget when making this price comparison that term premiums will often increase significantly when you come to renew, and a health emergency could mean that you are unable to obtain an insurance policy. Over the long term, the difference in the cost of these two types of insurance is not as great as it first seems.
How Can You Reduce the Cost?
If you can’t afford the level of cover that you want then there are ways to reduce your premiums, either by changing your lifestyle or simply shopping around.
When calculating your premiums, your medical history, lifestyle, and family history will be taken into account. There isn’t much that you can do about the medical history of you or your family (other than making sure of all the facts), but there are some lifestyle factors that can make a big difference to your premiums:
1. If you smoke, this will dramatically increase your premiums. You owe it to yourself to give up anyway to save money, improve your health and your life expectancy. Why not use getting your new life insurance policy as a trigger to give up smoking. In most cases you will need to have given up for more than a year for this to have an impact on you premiums.
2. Excess drinking is another factor in calculating your premiums. Don’t think that you can lie about it either. If you die the insurance company will investigate your lifestyle very carefully before paying out, and they have ways of finding out of the information on your application was incorrect. Start cutting down on your alcohol intake and you will see a whole host of health benefits as well as reducing your life insurance premiums.
3. Diet and exercise. Application forms will always ask for your height and weight, and any excess weight or obesity will tend to increase your premiums. Join a gym or a weight loss group and start shedding those extra pounds!
The final way to reduce your premiums is good old fashioned shopping around and bargaining. Don’t settle for the first offer that you receive. Use internet price comparison websites to seek out the best deals. Negotiate a reduced premium with the salesman.
The answer to this question is not simple and depends a lot on your personal circumstances and priorities.
The type of life insurance policy depends on you priorities and your premium budget. If you have a lot of money to spend on your life insurance and it is important to you that you leave a lump sum to your family when you die then whole life insurance would be the best option. If on the other hand your busget is tight and you are really only interested in being insured against death up until middle age then term life insurance would definitely suit your needs better.
The amount of life insurance required will also feed into the above consideration. Again this is not a simple calculation to make. What you want to aim for if at all possible is that the amount of life insurance that you buy could provide your family with an income that is equivalent to the amount that you earn at the moment. The income should be provided from the real return on the investment of the insured amount, that is the rate of interest less inflation. A reasonable long-term estimate for this real return might only be 2-3% (but take professional advice about this). Therefore to achieve an income fro your family after death of $20,000 would require a life insurance policy of $1,000,000.
Another point to bear in mind is the mortgage on your home (if you have one). It can make a great deal of sense to arrange a separate “decreasing term” life insurance policy to pay the mortgage off in the event of your death. The calculation of required income above can then be done excluding the mortgage payments. If you don’t have a decreasing term element in your life insurance portfolio then you will find that the amount that your family receives after your death (and after the mortgage has been paid off) will increase with time. This is usually the opposite of what is required.
Tags: amount of cover, Life Insurance, Term Life, Whole Life
