About 60% of individuals in the UK do not have life insurance. While many may argue that not having life insurance is like living without a safety net but – is it really worth it?
In this blog post, we explore the facts about life insurance, digging deeper so you can find out what makes sense for you!
How does life insurance work?
Life insurance is a contract, known as a policy, between an individual (the policyholder) and an insurance company (the insurer). In the simplest terms, the policyholder pays a regular premium and in return, the insurer promises to provide a predetermined sum of money, referred to as the ‘death benefit’, to the beneficiaries upon the policyholder’s death.
Think of it as a sort of piggy bank, but instead of saving for a new car, you’re saving to make sure your family will be okay if something happens to you. You put a little money into it every month, that’s your premium. If something unfortunate happens and you’re no longer around, the insurance company gives a much bigger amount of money (the death benefit) to the people you love.
Now, there are two types of life insurance:
1. Term life insurance
Term insurance is the more basic and less expensive plan. It offers coverage for a specified ‘term’, generally between 10 to 30 years. If the policyholder passes away within the stipulated period, the insurer pays out the death benefit. However, if the policyholder survives the term, no benefit is paid.
2. Whole life insurance
Whole life insurance does not have a specified term and provides coverage for the policyholder’s entire life. It also carries a cash value component which accumulates over time. This cash value can be borrowed against or even cashed out during the policyholder’s lifetime, offering a unique form of financial security and flexibility. However, the premiums for whole life insurance are usually higher than those for term insurance.
How much is life insurance?
When it comes to life insurance, there is no “one size fits all” rather, cost varies depending on several factors.
Now, what you pay each month will change based on a few things:
- How old you are and how fit you feel
- Your habits, like if you’re a smoker or a jogger
- Your family’s health history
- How long do you want the insurance to last
- The kind of work you do (some jobs can be riskier than others).
- Also, how much money do you want your family to get (that’s the cover)
- The money you owe e.g credit card debt, personal loans, car loans, student loans, and mortgages
- Your house payments (like rent or mortgage)
- How many people depend on you financially
- Your take-home pay or other money you have coming in.
Life insurance premiums can differ significantly, so you may find it valuable to explore various options and compare quotes.
Some avenues you can explore to obtain quotes include:
- Specialist brokers
- Directly from insurers
- Credit card companies
- Independent financial advisers
Getting quotes from brokers is considered the cheapest route and as such may be preferred by many individuals.
Why should you get life insurance?
Getting life insurance can be seen as a type of safety net. It can catch your loved ones, helping them bounce back when life throws a curveball.
Some important reasons why you may want to get one are:
1. It provides a safety net for unforeseen events
Life is full of unexpected turns. Sometimes, those turns can lead down rough paths that we’re not quite ready to navigate. In the case that anything unfortunate happens to you, wouldn’t you want your dependents to be taken care of?
This policy provides a clear path for your loved ones during challenging times. It is more than just a contract; it’s an act of love that offers comfort in knowing that your family will be financially protected if you were no longer around.
2. Sustaining your family’s future and lifestyle
Life insurance can offer something invaluable – peace of mind. It provides a financial buffer that can help fulfil your family’s future aspirations, even when you’re not there to witness them.
For instance, the payout can be used to ensure your children’s education isn’t compromised or to provide a nest egg for your partner’s retirement. It can also cover mortgage payments, protecting your family from the risk of losing their home. This way, even in your absence, your family’s future and lifestyle are secure.
3. Protecting your business interests
Life insurance isn’t just a personal safeguard; it is also important for businesses especially does that are dependent on a key person. For instance, a key person’s insurance compensates a business for the financial loss incurred due to the death of a vital employee.
Some insurance policies allow remaining partners to purchase a deceased partner’s share, ensuring smooth business continuity. Additionally, it can provide funds to repay business loans, protecting personal assets pledged as collateral, thereby serving as a protective shield against potential financial risks.
4. It can help you build wealth
Whole life insurance, not only provides a guaranteed death benefit but also accumulates cash value. It functions much like a savings account. Unlike the fluctuations linked to stocks and bonds, it offers steady growth. You can even borrow against your accumulated value to cover premiums, fund a dependent’s education, or bolster retirement income.
It also offers protection against debt collectors seizing assets and can be tax-advantageous with the right guidance from financial planners. Other benefits include the potential for enhanced growth through indexed life insurance, indefinite growth with universal life insurance as long as payments are maintained, and access to accelerated death benefits in case of a terminal illness. Finally, it ensures assets can be passed down to future generations, covering final expenses, outstanding debts, or medical bills, thereby reducing the financial burden on loved ones.
Is Life insurance really worth it?
Is life insurance worth it? This answer is it depends.
Consider the following factors to determine if getting one makes sense for you:
- Covering burial costs: Funerals can be expensive, and your loved ones might struggle to pay for them. Life insurance can help cover final expenses, such as burial or cremation, providing financial relief for your family.
- Income replacement: If your salary supports dependents, having life insurance can replace your income after you’re gone. This ensures your family’s financial stability and helps them maintain their standard of living.
- Debt coverage: While debts typically don’t pass on to others, co-signers, co-owners, or spouses in community property states may be responsible for outstanding balances. Life insurance can be used to cover these debts, easing the burden on those you leave behind.
On the other hand, if your death wouldn’t cause financial hardship for anyone, life insurance might not be necessary.
Consider the following factors to determine if it’s worth skipping:
- No financial dependents: If nobody relies on you financially, focusing on building your own wealth may be a better use of your resources. This insurance becomes less essential if the payout isn’t critical for someone’s survival.
- Budget constraints: Only purchase life insurance if the premiums fit comfortably within your long-term budget. Missing payments can cause your policy to lapse, leaving your beneficiaries with nothing. If ongoing costs aren’t feasible, it may not be worth it.
By evaluating these factors, you can make an informed decision on whether it’s truly worth it for you and your loved ones.
Factors to consider before getting life insurance
Now, if you want to get life insurance- just before you dive in, these are some important factors to consider:
As of 2001, the Society of Actuaries estimates longevity up to 121 years and this affects how premiums are calculated. The younger you are, the more you qualify for lower premiums. While it’s debatable whether the average person will reach this age, this calculation approach leads to more affordable premiums, particularly for policies bought early in life.
Statistically, women tend to have a longer lifespan than men, leading to generally lower insurance premiums. Of course, this isn’t a standalone factor; it’s considered along with comprehensive health data and medical records.
It’s generally advisable for your income and insurance coverage to align. Financial advisors and insurance agents can assist in determining a budget that suits your earnings. Permanent life insurance plans can often be seen as high-performing savings, providing significant returns and thereby becoming an asset rather than a mere expenditure.
Life insurance becomes more crucial when financial responsibilities are shared with another adult, regardless of marital status. It aids in financial planning at any age but can be particularly beneficial for couples aiming to secure mortgages, children’s education, and other expenses.
Life insurance acts as a safety net for your dependents, such as children, in case of your demise. It can cover living costs, educational expenses, and much more. The larger your family, the higher the coverage you may want to consider.
Coping with the loss of a loved one is hard enough without the added burden of significant debt. Life insurance can serve as a buffer, covering debts from mortgages to student loans, including any debt accrued due to long-term illness post-insurance acquisition. Aggressive financial planning is recommended to ensure your loved ones are secure after your demise.
Assessment of total assets and savings is often considered when thinking about debt. Assets like homes or cars might play a crucial role, but an unforeseen illness or accident can severely deplete a robust savings account, thereby emphasising the significance of life insurance.
Did you know that you can use “Know Your Dosh” to securely manage and share financial information with your loved ones? You can also monitor and track your assets, liabilities, tenancies, renewals and taxes- All from one secure platform.
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