Life Insurance

When thinking of the family finances and your personal wealth, savings and investing may be at the top of your agenda.  For some people however, life insurance can be a crucial part of taking care of dependents and loved ones in the event of their (untimely) death.  With this in mind, it can be helpful to understand what options are available and how they can apply in the real world.

Option 1 – Term or Whole Life?

A whole-life policy, as its name implies, is valid for the whole of your life.  In other words, it is guaranteed to pay out at some point, providing you maintain the premiums.  A term policy will pay out if you die within a certain period of time – the “term” of the policy.  Term policies can be useful to cover a present need, which you assume will be resolved at a set point in the future.  For example, it could cover the period of a mortgage or the period until minor children become adults.

 Option 2 – Level, Increasing or Decreasing Benefit?

The next question is whether you want the level of cover to stay the same over the term of the policy (level term), whether the level of cover should go up (increasing term), or whether the level of cover should go down (decreasing term).

Your choice is likely to be influenced by the purpose of the policy.  For example if the insurance is purely to cover a repayment mortgage, then a decreasing-term policy could offer the best value for money.  The need for insurance cover will reduce as the outstanding mortgage is reduced and therefore there may be nothing to be gained from having extra cover.  If, on the other hand, the policy needs to provide for young children in the event of the death of a parent then an increasing-term policy could be used to ensure that any benefit keeps pace with inflation.

 Option 3 – Lump Sum or Family Income?

A lump-sum pay-out can help with the immediate financial aftermath of bereavement.  For example it can take care of funeral expenses or pay off a mortgage.  On the other hand, suddenly coming into a large sum of money can bring its own problems.  There is no shortage of real-life stories about lottery winners who have wound up in poverty due to having mismanaged their wealth.  Some people may find that suddenly having responsibility for managing a child’s inheritance creates more stress during an already difficult period.  They may prefer the security of knowing they will have a regular monthly (Family) income to replace the deceased’s financial contribution.

 Key Question – What Level of Cover Is Required?

Having too much cover might cost money which could be used elsewhere.  Having too little cover could pose serious difficulties for your loved ones in the event of your death.  That said, if you are on a tight budget, then having even some cover may well be better than having none at all.  Again, the ideal level of cover will depend on your individual circumstances.

 Planning for the Future

As the old adage goes “Hope for the best, prepare for the worst”.  A financial plan should cover both the best case scenario (a long and happy retirement) and the worst case scenario (an untimely death).  Because of this, it can be hugely helpful to get some advice from a financial adviser.  This is particularly true for people who need to ensure that young children will be provided for in the event of the death of one or both parents.  Even those without children, however, need to think of their own plans for the future, and how they are going to finance them.

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