Before you sign up for a life insurance policy, it’s important you understand the different types available and compare life insurance policies against set of criteria. Comparing only the premiums payable may not be the right way to compare policies. This is usually because the differences in insurance types may have different outcomes at the end of the policy that you may not expect.
Comparing Apples with Oranges
If you ask an insurance advisor for ‘life insurance’, you may find you’re quoted on term life insurance. This shows you a very low premium that covers you with a cash payment amount in the event of your accidental death.
You’ll usually receive a policy renewal letter at the end of the year, showing you the changes in your premium rate. Most people simply keep paying this amount. However, the moment you stop making your payments, your policy is gone. You’re no longer covered, and any money you’ve paid into that policy over the years is also gone.
The majority of people will simply begin to compare premiums payable on this type of policy without fully realising that there is another type of life insurance available.
Whole life insurance is a policy where the term extends for your entire life and pays out upon your death. Some people are able to use this form of life cover as a type of retirement savings, as it’s almost like enforced savings over an extended period of time. Some of the money paid pays for the insurance portion, while the remainder of the premium goes into an investment account in an attempt to increase the death benefit payable.
Then there’s a kind of hybrid life insurance available, that offers a shorter term policy that may extend for only 10 years or 20 years. When the policy ends, you have the option of renewing the policy for a further term.
How Much Insurance Do You Need?
The primary reason most people buy life insurance is to guarantee that their beneficiaries are taken care of financially in the event of the policy holder’s death. However, if your cash payout figure isn’t large enough to pay out your current debts, your family could be left with no alternative but to sell the family home. This leaves them out on the street, with no extra cash to help them create a new life.
There’s also the question of leaving them enough money to invest into some form of income-generating investment to help supplement income, if required.
How much you need is entirely up to you. Just be sure you’ve worked out the figures involved before you sign a policy.
Comparing Your Options
Paying the lower premiums on term life insurance right now can be one way to keep cash flow under control. However, the higher premiums payable on whole life insurance may give you some kind of guarantee that your current rates are locked in for life.
Imagine that the low premiums on term life insurance will be re-visited each year upon policy renewal and adjusted to CPI. This means they’re likely to increase each year you remain with that policy. After 30 years, the amount you’re paying isn’t likely to resemble the figure you pay out right now.
Yet, with whole life insurance, the premiums you pay now might look higher by comparison. However, in 30 years, those premiums are likely to stay very close to where they are now. There’s also the benefit of having the money you pay into the policy increasing in value over time. This gives you a larger benefit amount in the long run.
Before you purchase any life insurance policy, always make sure you’ve done your comparison shopping fairly. Choose the type of policy that best suits your long term goals and then shop around for the right policy that matches what you want.