Wills, trusts, tax and probate
Life insurance: term vs. whole of life – what’s best for you?
If the Coronavirus pandemic has done anything, it has shown us that we never know what’s around the corner. So, while taking out life insurance might not be at the top of many people’s ‘to do’ list, it is arguably one of the most important financial products anybody can purchase.
Over the past few months, thousands of people have lost loved ones tragically and unexpectedly, pushing them into financial hardship at an already difficult time.
- What is life insurance?
- Do I need life insurance?
- What is the difference between term and whole of life insurance?
- What are the advantages of term life insurance?
- What are the disadvantages of term life insurance?
- What are the advantages of whole of life insurance?
- What are the disadvantages of whole of life insurance?
- What type of life insurance is best for me?
What is life insurance?
Life insurance is designed to pay out a lump sum to your family in the event of your death, enabling them to keep up mortgage payments, bills, childcare costs and whatever else is required to maintain the lifestyle they’re used to when they no longer have your income to support them. A payout from a life insurance policy could make the difference between your loved ones facing a financial struggle at a challenging and emotional time and being able to maintain a stable environment with the standard of living they enjoyed while you were still with them.
Do I need life insurance?
If you need convincing that life insurance is a good product to buy, then ask yourself this: if you were to die, how much money would your family need have to live on? How long would it be before they found themselves running short of money? If your income covers vital outgoings such as the rent or mortgage, bills, or grocery shopping, then taking out life insurance is an excellent decision.
Even if you aren’t the main breadwinner, however, you may still be making a contribution to your family that would be difficult (not to mention expensive) to replace if you were no longer here. You may for example, be the primary care giver for your children, providing housekeeping and other home-based services that are critical to your family’s wellbeing.
What is the difference between term and whole of life insurance?
Term and whole of life insurance are the two main types of life insurance available on the UK market. A term life insurance policy is designed to last for a certain period of time, called the ‘term’. It will only pay out if you pass away during the term of the policy. If the policyholder dies after the term has expired, the policy won’t pay out.
On the other hand, whole of life insurance does exactly what it says on the tin – it will pay out to your beneficiaries whenever you die, no matter when that is, because it is designed to last for your entire lifetime.
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What are the advantages of term life insurance?
The main advantage of a term life insurance policy is that it is designed to be temporary. So, it can cover you while you have financial responsibilities such as a mortgage and children to take care of, but you can stop paying premiums once your children have grown up and moved out.
It can also be a cheaper option as there is less risk associated with it for the insurer. Term life insurance policies can therefore provide the maximum death benefit available for lower monthly premiums.
Term life insurance policies also tend to be simpler and a lot easier to understand than permanent policies. There tend to be fewer exclusions, hidden costs or risks to worry about later down the line.
What are the disadvantages of term life insurance?
Because term life insurance policies expire, you may have to take out another policy to cover you. However, because you will be older and will therefore be perceived to have more age-associated health risks, premiums for a new policy will increase the older you get. For example, taking out a policy in your 20s or 30s will be cheaper than if you were to take out a new policy in your 50s or 60s.
Term life insurance can also be more uncertain. You may pay premiums for the whole of the term for no benefit, if you outlive the policy period, while you may develop a health problem during your term that renders you uninsurable, making it difficult or impossible to take out a new policy once your term life insurance policy has expired.
What are the advantages of whole of life insurance?
Whole of life insurance has the obvious advantage of lasting for the policyholder’s lifetime, thus providing extra security by guaranteeing a payout to your beneficiaries, no matter when you die. However, there are also other benefits to be aware of.
Unlike a term policy, you won’t face having to find a new policy when your current one expires, so you will remain insured even as you get older or if you develop health conditions.
Some whole of life insurance policies also offer the unique advantage of allowing you to invest your premiums in stocks and shares, enabling you to grow your money depending on how the stock market performs.
What are the disadvantages of whole of life insurance?
The main disadvantage of whole of life insurance policies is the expense. Whole of life policy premiums can be many times more expensive than a term policy covering you for the same amount – this is because insurers know that they’ll have to pay out on your policy at some point, whereas they may never have to pay out on a term life insurance policy.
They are also more inflexible, and you may find the premiums more difficult to keep up with as you get older, retire and have less income to live on. If you mainly need life insurance to cover you while you have mortgage payments and dependants at home, then term insurance will be more suitable because you can cancel your policy once it’s no longer needed.
What type of life insurance is best for me?
This entirely depends on your personal circumstances and what you need the payout to cover.
One of the biggest selling points of whole of life insurance is that it can be used to help your family deal with an inheritance tax bill. These bills can really shoot up if the value of your estate exceeds the nil-rate band threshold of £325,000 and has to be paid before your beneficiaries are given access to your estate. As such, many families are forced to take out huge loans to cope with the cost, adding stress to this already heart-breaking time. It should be noted, however, that a whole of life insurance policy can only help your family in this way if it is written in trust – this means that the payout from your policy won’t be considered as part of your estate.
However, if you need life insurance to cover a particular period in your life where you have a lot of financial responsibilities, then term life insurance will be a cheaper, more flexible option that doesn’t leave you paying expensive premiums when you no longer need to.
At Tees we provide independent financial advice across a whole range of financial products, including life insurance. Working in partnership with you for the long term, we are always there when you need us.
If you need help choosing the right life insurance product for your needs, call us today.
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But we can help you wherever you are in England and Wales.
This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument.
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