If you’re considering taking out life insurance for the first time, you might feel overwhelmed with information regarding the different types you can opt for. Life insurance will provide a financial safety net for your dependents if you’re no longer around to care for them but can also stand to cover the cost of funeral expenses and mortgage repayments. Before settling on a specific type of insurance policy, you must first assess your family’s needs and requirements both pre and post death.
There are two main types of life insurance, and it’s important to know the difference between the two so that you can decide which will be best. Here’s a straightforward guide to give you more of an idea.
What is term life insurance?
At its most basic, any type of life insurance will pay out a sum in the event of your death. Term life insurance is the most straightforward type of protection as it pays out if you die within a fixed period of time (referred to in this case as a ‘term’). Of course, if you were to die after this agreed term time, no payment would be received by your dependents unless you were to renew your policy.
The pros and cons
The main advantage of term cover is that those who opt for it will usually pay lower premiums than those who choose a plan that will cover them for their entire life. By agreeing on the length of the policy term with your insurance provider (e.g. 25 years) along with the amount of cover (e.g. 100,000), you’ll have the knowledge that if you were to die any time within that time period, your dependents would receive a payout. This also means that if you were to die within a year of buying the policy, the payout would be the same than if you were to die in the policy’s final year.
This means that term life insurance is great for anyone looking for an option that will cover them for a certain period. It may be that you want to take out a policy that will cover the cost of your mortgage in the unlikely event of your death, for example. It also usually means that you’ll be paying less money (or premiums) per month for a set period of protection, usually ones that coincide with your working years. By opting for term life insurance, you can guard you and your family against almost any uncertainty for relatively little money.
However, it’s worth bearing in mind that your circumstances may change over time. You may have bought a term insurance policy before you had a child, for example, or your child may have grown up and left home and you therefore no longer require as much cover. Another potential disadvantage with term life insurance is that, with the knowledge that you’re only paying for death benefit, you will not receive anything back once your policy is over. You will also not receive anything back if you had a life-changing incident or injury that left you alive but unable to work. In this event, disability insurance or critical illness cover would be able to pay money (click here to learn about disability insurance for lawyers in detail). Additionally, life insurance providers may set a minimum and a maximum amount of how much they are prepared to issue and this usually depends on the age of the applicant. By keeping these things in mind before you commit to a policy, you should be able to choose correctly.
The different types of permanent life insurance
Within the spectrum of permanent life insurance, there are a number of different types meaning prospective policyholders can often become confused. This type of life insurance is often called whole life insurance because it covers the policyholder for their entire life. As the name suggests, this type of policy is well suited for those who wish to have a permanent guarantee that their family and loved ones will be well cared for in the event of their death, no matter when that may be.
Another type of permanent life insurance is universal life insurance which pairs term insurance with a saving element. This is best described as an insurance policy that can be adjusted alongside flexible premiums and insurance companies break these down into the cost of insurance and the cash value. Understandably, the cost of insurance must always be covered to keep the policy working, but holders can change their premiums over time based on their needs. This is therefore considered one of the most flexible life insurance policies.
Variable life insurance is another type which allows you to invest the majority of your premiums into several investment funds (e.g. stocks and bonds) with a guaranteed death benefit. Because of this, this type of insurance is considered an investment and therefore has a number of risks.
The pros and cons
With any permanent life insurance, one of the main benefits is that policyholders have the option to accumulate cash over time. Usually, the reason people take out permanent life insurance is to cut the cost of their family’s tax bill, particularly when it comes to Inheritance Tax. When you die, inheritance tax will be charged at 40 percent on all of your assets worth more than 325,000 including your home. By taking out a whole life policy and writing these assets under trust, your family will receive a cash lump sum in the event of your death which they can use to pay off this inheritance tax. Another advantage of certain permanent life insurance plans is that they include sickness or disability benefits.
On the other hand, permanent life insurance can often be very costly, sometimes even costing the policyholder up to ten times more than term life insurance. This is because insurance companies know that it will be paying out eventually whereas with term insurance there’s a chance you could outlive the policy. Many companies will guarantee that they will not increase your premiums in the first ten years of the policy but, once this time has passed, they may review your cover and hike premiums accordingly. Factors that can change your premiums can include your age, your health and whether or not you are a smoker. The biggest complaint about this type of cover is that often people do not realise their premiums will be reviewed. Plus, with some plans, you could be paying out until you die which can become very costly if you live to 105.
We hope that our guide to permanent vs. term life insurance has helped you decide on the best option for you but if in doubt, contact a reliable and experienced insurance company such as Call Wiser who can lead you in the right direction and get you the best deal, whichever insurance type you choose.