Deciding whether you actually need life insurance and then determining how much too actually cover yourself for is hassle enough, without then being asked the question by your insurer; how precisely would you like to be insured? The reality is a
number of people end up taking out policies which are ill-suited to their own circumstances, due to a lack of clarity surrounding what different types of cover entail. Whilst there are a number of life insurance types which incorporate elements of investment and savings, it can be argued that there are two primary forms which you will need to consider when purchasing your life insurance policy. These are: Whole-of-life insurance and Term-based insurance.
It is advised that you attain specialist financial advice when seeking to come to a final decision in this area, as we have interacted with a number of people who have conveyed their opinion that they are paying too much, or too little, on cover that isn’t well matched to their circumstances. However, we will explore the key characteristics of both in this article, in order to give you an initial indication of which one reflects your situation the best.
As it sounds, whole-of-life insurance will ensure that your dependents are paid out, regardless of when you die. This means that irrespective of whether you die a day after taking out your policy, or 60 years later, your loved ones will receive a fixed and pre-determined sum as a payout from your cover. You will have to pay more on your monthly premiums for whole-of-life cover, and would also have to consider acquiring an inflation clause facility which would ensure that the amount your dependents stand to be paid out rises in line with the cost of living in your place of residence.
Conversely, term insurance will pay your dependents out in the event that you pass away during the term of your policy. So for example, if you insured yourself for ten years, your family would receive a payout in accordance with how much you covered yourself for, providing that you died during the ten year period. In order to receive a payout after this, you will have to renew your insurance or acquire a new policy, which might be more expensive due to you being older. However, the initial premiums will be cheaper than whole-of-life cover, and you might not think it is unnecessary to pay more for cover you do not need for your entire life, especially if you have older children or are over 50.
As such, it is important to assess your own reasons behind acquiring cover for your dependents in the first place before deciding which length of cover is more appropriate to your circumstances. If you would classify yourself as being in the top-income bracket, and want to use your life insurance in tandem with a trust fund in order to ensure that your dependents attain the maximum possible amount of money from your death, then you might want to think about whole-of-life cover, particularly if you are under 50. Most whole-of-life policies come with an investment aspect incorporated into them, so if you want to generate as much money for your dependents as possible and want to use your life insurance cover to shield them from the taxman, then you should consider this type of cover because term based insurance does not include these features.
However, if you are not in the top tax bracket for income, and intend to take out your life insurance to cover the costs of your mortgage, then it might be better suited for you to acquire a policy which has the same term as your existing mortgage. This is because you can cover your family for the size of your mortgage – achieving your aim for taking out the cover in the first place – and pay less on your premiums each month. You will also have to consider whether you want to take out level-term or decreasing term cover, which is simply deciding whether you want to pay less each year in order to be covered for less, or want to keep the amount you’re paying each month and stand to get paid out the same. Ultimately, someone who is getting life insurance purely to cover their mortgage expenses might be best off looking at a decreasing-term deal, as this would mean that the amount they are covered for decreases as they pay off more of their mortgage.
Typically, whole-of-life cover will come with a heightened degree of flexibility compared to term-based insurance policies, and will enable you to change the amount you cover yourself for if you are able to pass additional medical underwriting. You might also be allowed to do this without the medical underwriting in specific circumstances such as the event that you have another child. With term insurance, you might be able to make small alterations, such as increase your level of cover when your family situation changes, but generally speaking you will have to adhere to its initial terms and conditions throughout.
It is worth taking the above into consideration when deciding which cover to attain, and remembering that whilst whole-of-life insurance is more expensive and extensive, that nevertheless it can be an unnecessary financial burden to place upon yourself if you don’t actually need that much cover. You should ask your financial advisor about which type of cover he believes reflects your situation best before making your final decision, and evaluate the context behind your decision to get insurance in the first place, to give yourself a strong initial idea of the answer.