What is the Best Life Insurance

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