Want to know more about life insurance? Unsure whether to take out a fixed term or a full life policy? It’s understandable that you want your family to be provided for in the event of your death. So, read on to learn more about the pros and cons of both types of policies so that you can choose the right one for your circumstances.
Term insurance gives you the flexibility to choose the amount you want to be insured for and the number of years for which you have cover. Typically these policies cover 10 or 20 years and no more than 30 years. The policy would pay out if you died within the specified term. However, if you don’t die within that term, there is no financial pay out at all, and you lose all of the money you’ve paid into the policy – though it will have given you some peace of mind. Moreover, some fixed term policies come with the option to convert to a life policy but check before you sign up, as this differs from policy to policy, as does the deadline for conversion.
Term policies are split into ‘level’ and ‘decreasing’ policies. A level-term policy provides the same lump sum of money for the whole term of the policy, while with a ‘decreasing’ term cover; the lump sum reduces over the length of the policy. The latter could prove helpful in repaying a mortgage or another debt that diminishes over time, and as the amount paid out reduces over time, these can be particularly cost-effective (if not so comprehensive).
In addition, there are also term policies available that pay out a regular family income for a fixed term, so you could match your salary for a specified time. However, the latter only pays out for the term of the policy, so your family may not benefit for long, once the term is over, so the payments stop.
As you would expect, full life policies or whole-of-life policies continue for the duration of your life (as long as you have been paying the premiums) and pay out when you die. They are not linked to a particular ‘term’, and so provide more comprehensive cover. In some ways, full life cover is the most straightforward and simplest of the life insurances policies available and the one most likely to result in a payout.
When compared together, full life insurance is understandably more costly than a fixed term policy. That’s because fixed term policies last for a specified number of years, and that term is likely to finish before you die. Hence, insurance companies don’t pay out in many cases.
Full life insurance policies, however, are designed to exist until you pass away meaning the insurance company is likely to pay out – hence the greater expense. However, with the greater cost comes more comprehensive cover, potentially greater benefits and more reassurance for you and your family.
Some commentators advocate taking out the cheaper fixed term policies and investing the difference between this and the more expensive full life cover. However, this approach has some risks and drawbacks attached to it, you have to be disciplined and knowledgeable enough to invest, and keep this up throughout the whole term of the policy. In addition, given all investments carry some risk, you cannot be certain that they’ll provide you with the returns for which you hope.
So when looked at overall, term life insurance gives you a choice in the policy length, while whole life insurance does not. However, the latter gives you lifelong coverage with more certainty of a payout, while the former does not. For both types of policies the premium typically remains the same for the duration of the policy, (though not in absolutely all instances).
However, if your priority is to find the policy with the cheapest premium, then choose a fixed term policy. But bear in mind a full or whole life policy may accumulate cash value over time and in some cases may even pay out annual dividends. With some full life policies, you can also borrow against the account or surrender the policy for cash which could benefit you during your lifetime – not something that is possible with a fixed term policy.
Full life policies can be advantageous if you want to provide funds to pay any inheritance tax due on your estate. If you want to assist your heirs in holding on to the family home and heirlooms in the event of your death, rather than sell them off, a full life policy might be the one. Also, if you have a lifelong dependent, it would allow you to provide care and financial security for them.
Also, full or whole life insurance can be helpful in making an inheritance equal if one child is going to inherit a business or a farm for example, while the others are not. Having a full life policy also means you don’t need to worry about holding on to your retirement savings to cover costs in the event of your death. You can enjoy your retirement savings during your lifetime and let your policy cover any costs caused by your death.
All policies have their benefits as well as their terms and condition; the crucial thing is to find the right life cover for you. When you’re considering which insurance policy to take out, think about what you want or need it to do. What are your priorities? Pay off a mortgage; provide a regular income or give your dependents a large lump sum of money?
Remember too that all life policies have their limitations and only pay out in the event of someone’s death, not if they become ill or disabled for example. So you might want to take out additional critical illness cover or an income protection plan as well. As well as considering your budget and what you can afford. To discuss your insurance needs, talk to an experienced insurance broker, like the team at Call Wiser, they’ll help you to find the right life cover.