Which life insurance policy is best for me?

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Whether you care to dwell on it or not, the simple (albeit fatalistic) fact of the matter remains, none of us are going to be around forever.

Which is why we need to think of the (much) bigger picture sooner rather than later, if not for our own benefit then for those we leave behind when we shuffle off this mortal coil.

The bigger picture being how we’re going to financially compensate for our loss (timely or otherwise), in terms of leaving enough money in the bank for our nearest and dearest to survive in our wake. Or to be more specific, AFTER our wake.

Unless you’re already incredibly wealthy, then your family might struggle in a monetary sense once you’ve gone.

Presuming you’re the main breadwinner the effect of suddenly eliminating your income stream from the family coffers would hit hard, especially so if there’s an outstanding mortgage and/or personal loans to pay off, and that’s once someone has stumped up for your funeral costs. Which in this day and age, don’t come cheap.

The answer (or rather one of the most obvious answers) is life insurance.

Arranging an all-encompassing life insurance policy (particularly from a young age) can really pay dividends in later life, for those left to pick up the financial pieces when you’re six feet under.

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But if life insurance is the stark-staringly blatant answer, then the question which habitually precedes it is “Just what sort of life insurance policy is best for me?” Which is where we’re here to help.

Before we go any further we must first establish what life insurance plans are typically on the table, which essentially amount to the predominant two: Term Life Insurance and Whole Life Insurance.

Mercifully both alternatives are pretty straightforward when it comes to explaining them. Term life insurance is all about providing a pre-determined death benefit which covers the insured party for a pre-agreed number of years (anywhere between 5 to 30), and which offers fixed premiums from the outset and are generally based on the policyholder’s health status and life expectancy at the juncture they first apply.

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Permanent life insurance routinely combines a death benefit with either a savings or investment account element. The difference being this package extends to cover the individual for as long as they’re alive. Similar to term life insurance, the premiums are calculated on the proposer’s health and medical history at the time of sign-up, whilst you can elect to fix them or not depending on the specific policy you choose at the time.

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For the most part permanent life insurance isn’t adjudged to represent the best value for money as ostensibly it ends up costing the policyholder much more money than its term alternative, yet offering what amounts to the same coverage.

Although a permanent policy admittedly accumulates some cash value via its savings/investment component (which if you recall the term plan doesn’t offer), you’ll have to fork out a large premium to acquire this additional feature and for obtaining a policy which will pay out one day.

Depending on at what stage of your life and times you plump to buy a life insurance policy, a term variation on a common theme will (hopefully) expire before you do.

OK, there is the much-trumpeted bit where a permanent policy says that you can borrow against it should a situation arise where you could do with freeing up a bit of cash, however think of it like this… With the money you save by opting for the term life you could squirrel away a decent amount for a rainy day anyway, thus negating that need to borrow at a later date.

What’s more (and not as keenly flagged up for those whose life insurance allegiances lie in the pro-permanent camp), if and when you choose to borrow against your permanent policy you systematically diminish the overall value of the potential pot of gold. Which kind of defeats the objective of having life insurance in the first place, doesn’t it?

But, and it’s a big but, at the end of the day it’s all about individual preferences and arguably most importantly of all, just where you are in life when you experience that light bulb-pinging moment regarding getting life insurance. And we don’t mean a physical location like in the frozen food aisle at your local supermarket. More a case of metaphysically, emotionally, monetarily, family-wise, etc… let us explain…

We’ve identified key times in everyone’s lives when it might be considered pertinent to arrange a life insurance policy. Term life insurance that is, having already established that this offers the best route to future (monetary) happiness even during unexpectedly darker days.

The following bitesize guide looks at precisely when and why you should ideally invest in life insurance and how much coverage you really need to secure at that point.

All the single ladies (and gentlemen)

If nobody is dependent on you from a financial perspective (i.e, if you’re single and don’t have children), then it’s fair to say life insurance might not be top of your agenda right now.

While nobody would disagree that your untimely demise wouldn’t affect a lot of people, it won’t necessarily place them in financial uncertainty. That said, your parents may still be around, and if they’re not financially well-off themselves then it may be worthwhile purchasing a small, inexpensive term life package that would at least cover your funeral and burial costs to save them coughing up.

Blushing bride and groom

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Despite it not being written in stone (or as part of any pre-nup agreement), snapping up a term life insurance plan once you’ve got married makes perfect sense. The reason being that getting hitched more often than not stands as a timely precursor to buying a house together and/or starting a family of your own. And both of these eventualities are hugely important reasons for sorting out a life plan of any description.

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The older you become, the more expensive life insurance plans become – based on the industry-wide assumptions that the older people get the more susceptible to injury and illness they are. This chain of events really bumps up the cost of such policies, often putting many out of the financial reach of would-be policyholders. Hence this presenting itself as an ideal time to make the leap of faith.

Be happy in your new home

This event acts as a big wake-up call to those of you who still haven’t got around to arranging a life insurance policy, and if you’re still deliberating on the merits, cue the arrival of mortgage life insurance paraphernalia falling through your brand new letterbox once you move in.

Thing is mortgage life insurance and mortgage protection plans are designed to protect the policyholder/mortgage-holder against the loss of income and ultimately the threat of having their home repossessed if they can’t maintain the payments.

There’s no disputing that it’s vital to safeguard the possible compromising of the breadwinner’s income stream when significant outgoings like a mortgage enter into the equation, remember that you wouldn’t necessarily need to immediately settle the outstanding mortgage payments should that mortgage/policyholder pass away, which essentially is what mortgage protection insurance is geared up to do.

You have to think of the long game, and that means sourcing the cash to cover ALL of your living expenses should this scenario play out. Term life insurance affords the policyholder/dependant the financial means to distribute the money as best serves individual family’s needs.

The pitter-patter of tiny footsteps

Perhaps even long before that familiar sound is first heard to be honest, but either way one of the most crucial times to think about (and subsequently act upon) acquiring a decent life insurance policy is when children are in the offing one way or another.

From the moment they come into your life your kids rely on you to provide for them, so from the moment that you learn that you’re expecting to become a new parent you should start seriously talking about life policies; providing you haven’t before then.

At this juncture it’s a given that you’ll be after a more substantial and far-reaching life insurance policy which will cover a minimum of 18 years of child-rearing expenditure (parents amongst you will be sagely nodding in acknowledgement right about now) as well as perpetual household expenses.

It’s essential that as a would-be policyholder you earmark enough insurance in terms of a figure that allows you and your immediate and future family to continue enjoying the trappings and standard of living that you recognize here and now. Learn more about new parent life insurance.

I hope I’m old before I die

If you plumped for term life insurance then by the time you reach your more twilight years there’s the very real prospect that such a policy will have expired.

Unfortunately trying to secure a cost-effective policy at this point will be very expensive and possibly beyond the means of many, based on the underlying fact that your chances of becoming ill significantly increase in later life and you’re therefore considered a greater risk from a life insurance provider’s perspective.

For those who select a whole life policy you can rest assured it will continue to be run-out until you’re no longer with us, however if the policy is no longer required early termination might be worth thinking about. This way you’ll save paying any more monthly premiums and have access to your cash pot which has been piling up nicely in the intervening years.

Instances whereby you can cash out would include having accumulated enough retirement fund/pension/nest egg during your working life to release these safety net funds, your mortgage having been paid off and your children having grown up and ably supporting themselves financially nowadays.