Before the insurance industry invented whole life policies, all life insurance was in the form of term life insurance. This is where an insurance company agrees to pay your beneficiary the agreed insured sum if (and only if) you die within the term of the insurance policy. In return for this you pay an insurance premium on a monthly, yearly, or one-off basis. If you don’t die during the term life insurance period then you will receive nothing.
This is in contrast to “whole life” or “whole of life” policies which will pay out the agreed sum (if the insurance premiums are payed) whenever you die, even if this is at 90 or a 100 years of age.
Advantages of Term Life Insurance
When compared with whole life insurance, the major advantage of term life insurance is the much lower premiums for the same insured amount. As the insurance company is effectively taking a bet on whether or not you will die within the insured period the premiums can be a lot less (sometimes 10% or less) of the whole life premium. This is because there is no need for the policy to have an investment element to pay out on your eventual death.
For people on a tight budget the cost of term life insurance premiums can be varied by opting for a shorter (cheaper) or longer (more expensive) term. In this way you can get the level of life insurance cover that you think you need within your budget.
Disadvantages of Term Life Insurance
If you don’t die you will receive nothing! This is the main reason why whole life insurance policies were invented, to give an investment return in addition to life cover.
Premiums will increase when your term ends. If at all possible you should arrange term life insurance for the whole time that you think you will need it (e.g. the period of time that you expect to have children in education). Also try to get the premiums fixed for the longest time possible. Otherwise you will face the problem that when you come to arrange a new term life insurance policy the premiums will increase based on your age.
Tags: Life Insurance, Term Life
Most people should have life insurance. If you have any dependents, if you have any loans, or if you simply want to leave a large sum of money to your family when you die then you need it. The question then becomes what type and how much cover do I need?
1. How Much Cover?
The question of how much cover you need (or what you should be aiming for) is quite complicated to work out, but the principle is simple. Ideally your insured amount should be enough to provide an investment income that replaces the amount of money that you currently earn without eroding the real value of the capital invested. Don’t forget to include in this calculation any services that you currently provide for your family (e.g. childcare) that would have to be paid for if you die.
e.g. if you need to provide an annual income of $20,000 for your beneficiaries this would require an insured sum of $1,000,000 at 2% (average return on investment 5% from interest-bearing bonds less average inflation of 3% giving a real return of 2% on capital).
2. What is Your Budget For Premiums?
This is really important and you need to be realistic about how much you can really afford. There is no point being covered against the unfortunate event of your death if you cannot afford to feed your family because your life insurance premiums are too high.
3. What Type of Life Insurance?
The two main types of life insurance are term insurance and whole life. Term insurance covers you for a specific period of time and is cheaper than whole life. Whole life will (as its name suggests) pay the insured value whenever you die. Your budget for premiums may force you to choose term life to get the level of cover that you require. Premiums for this type of insurance are much lower than for whole life. If you can afford whole life cover then you will need to decide whether the investment aspect of this type of policy is important to you.
Life insurance premiums are worked out in a very scientific way, using statistics relating to tens of thousands of people and how they lived and died. What are the major factors used to determine the cost of your life insurance?
Age Your age at the time you apply is clearly important since (everything else being equal) you are more likely to die within an insured period the older you are.
Health Insurance companies will be interested in any existing medical conditions that you have. These might either increase your premiums or render you ineligible for the insurance.
Family History If you have a family history of heart disease or other major illness then this is going to increase the cost of your premiums.
Occupation Strange though it may seem, there are statistics that show quite large differences in death rates between people in different occupations.
Diet and Exercise The insurance company will be interested in whether you eat healthily and exercise. The best way of measuring this is by requesting your height and weight measurements.
Smoking and Drinking Smoking is the largest cause of preventable death and expect your premiums to increase dramatically if you have smoked in the 12 months before applying for your life insurance. Drinking to excess is another frequent cause of health problems so the insurance company will want to know whether you over-indulge in alcohol.
High Risk Leisure If you fly your own plane or go rock climbing regularly then expect your premiums to increase.
How can you change things to bring down your premiums
Obviously there is nothing that you can do about your age! If you have any health issues (either yourself or in your family history) make sure that you present them in the best possible way. Get all the facts as it will look a lot better if you can say that your Father died of cancer when he was 86 than just saying that he died of cancer. Investigate whether altering the way you describe what you do can reduce your premiums. Look at all the factors that are under your control (weight, smoking/drinking, risks) and consider whether you can change any of them. It might be worth getting a term insurance policy for a short period (which will be cheaper) whilst you change some of these factors.
Tags: Life Insurance, life insurance premiums, life insurance risk factors
