If you want to make sure that when you pass away, your loved ones will be able to pay funeral costs, or you simply want to leave them some money to help them out with their own lives, life insurance is worth thinking about. Like most other insurance, you pay a predetermined monthly payment to the insurers, who in return pay out either a fixed sum or an accumulated sum to your loved ones in the event of your death.
There are two types of life insurance, and deciding which one will suit your needs best will depend on your own personal circumstances and how much you can afford to pay each month in premiums. The two types are term life and whole life.
Under a term life insurance policy, you pay a set amount to your insurers over a set length of time. The length of time could be anything from a single year, all the way up to a few decades. In the event of your death, the insurer pays out the sum that was agreed when you took the policy out. However, if the set amount of time on your life insurance has expired before you pass away, your insurers will not pay you.
With whole life insurance you are covered for however long you live. There are usually terms in the contract which say that if you live to a very old age, such as 90 or higher, your policy no longer covers you, so if you were to die at the age of 91, the insurers would not give you a pay-out. However, as whole life insurance policies cover you until your death, rather than a set length of time, you can be certain that your loved ones will receive a pay-out when you pass away. This makes it less risky than term life insurance, as you can be sure of pay-out, although the much higher monthly premiums are the price you pay for that.
The different policy types have different investment values. Term life policies have zero investment value. From the start of the policy, the pay-out amount is fixed, and you cannot borrow against the value of the policy. Like with other types of permanent insurance, with a whole life policy you can borrow at an interest rate that is usually lower than credit card or other loan sources against the cash amount value that has built up. Another difference with whole life insurance is that the cash amount builds up over time due to the interest earned on the premiums you pay.
Despite the lower rate of interest than credit cards, taking out a life insurance policy simply to borrow money is not considered a good investment. Be careful if you are considering borrowing money against the cash value of your whole life insurance policy, as you are essentially paying your insurers to borrow your own money.
Whole life policy premiums are much larger than term life premiums for the same coverage amounts. This makes whole life insurance policies much more expensive, but they do guarantee that your loved ones will get a pay-out in the event of your death. Term life policies only cover a specific amount of time, meaning if you die outside of that period, your loved ones won’t receive a pay-out at all. Whether you want to be sure that your loved ones receive a pay-out when you die, or if you want a life insurance policy with smaller payments and easier terms will be the main factor in influencing your decision over whether to buy term life or whole life insurance. Term life insurance policies do often have the option to renew the policy after the initial term has elapsed, however, so that is worth bearing in mind when making your decision.
Because of the enormous premiums of whole life insurance, most people buy a term life policy. Any spare money you have could be spent invested in other avenues that will provide money to your loved ones in the event of your death. A lot of people prefer this option, rather than trying to keep up with huge premiums on a whole life insurance policy. You might find the peace of mind more important, however. Remember to think carefully when choosing your life insurance policy, taking into consideration your own personal circumstances.
|Written by :|
|Jemma is a news & research reporter for compareandsave.com.
Having worked as a journalist on a number of personal finance websites; she now spends time researching and commenting on UK personal finance stories and investigating new ways to help our readers save money.
For press enquiries, please visit our Media Centre page.