Once you break through all the complex terminology, life insurance can be a really great product, and something that your family will thank you for later down the line.
The two main types of life insurance are:
• Term life insurance: This type of insurance is set for a term, a.k.a. a period of time. This could be ten years, twenty or more, but if you pass away within that time, the policy will pay your family the money you were insured for.
• Permanent life insurance: This type of insurance is also known as whole of life cover, and, as the name suggests, stays with you for all your life. Over the years you pay into the policy, the value of it grows, and when you pass away it is paid to your dependents.
Understanding these two very different types of insurance is crucial to the insurance purchaser, and knowing some of the key elements that influence the cost and type of policy you can get will help to score you a great deal. Here’s what you need to know about term and permanent life insurance.
Term life insurance
As stated, term life insurance covers you for a certain period of time. This type of policy is usually taken out by families with children or by couples who have a large joint mortgage. The money that is paid out is designed to either help the other party cope with a loss of income, or to pay off their portion of the mortgage if they are no longer around.
Ideally you would set the term on this type of life insurance to end when your family’s need would end. For instance, when your kids are grown up, the mortgage is paid off and you’d hopefully have amassed a little savings pot to act as your safety net going forwards. If you do not die within the term, you cannot get any money back.
Permanent life insurance
Permanent or whole of life insurance is something quite different. It is usually more of a tax avoidance issue than a real family safety net, although in some situations it functions well as both. The big advantage here is that you’ll always get something back, or at least your loved ones will, because the policy stays with you for life and will always pay out on death.
Premiums for this type of insurance are significantly higher, because a payout is guaranteed. Because you can put this policy into trust, you could avoid paying high amounts of inheritance tax by paying into this instead of leaving it in the bank.
Which is right for you?
For most people, a term life insurance policy will be more appropriate for their circumstances. Term life insurance suits people who:
• Don’t want to leave their loved ones with big debts
• Want to provide for their children after they are gone
• Are looking for an affordable policy with fixed premiums
Whole of life or permanent insurance might be right, but not in many circumstances. Usually this type of policy is idea for those who:
• Want to accumulate a cash value on the policy
• Are looking for a way to liquidate to avoid large tax bills
• Want to spend their retirement savings while still leaving a legacy
Many financial specialists will suggest taking a term policy and saving the rest of what the whole of life policy would have cost. This way you are covered, and yet still building up a sizeable nest egg. If you do take out life insurance, ask your financial advisor about writing the policy into trust. This will avoid your family paying big taxes on the benefit, and will help them gain access to the money faster, which can be a major benefit when it comes to paying for funerals and estate taxes.
We are partnered with leading insurer Arthur J Gallager & reinsurance giant Capsicum RE to enable us to provide insurance policies based off your Lexikin profile.