The idea of life insurance is to provide a level of financial security for your loved ones if you are no longer around to take care of them and it offers a certain amount of peace of mind when you know that you have taken steps to make provisions for an unexpected outcome.
When you take out a term plan it is hoped that you will have taken a look at all of your options and decided which type of insurance cover is right for you and your individual requirements.
However, it can be confusing when it comes to trying to decide what level of cover you need and what type of policy to buy. Here are some pointers to help point you in the right direction and make a decision that meets your needs.
Understanding term insurance
A good starting point would be to understand what you are buying when you take out term insurance and what the policy is intended to do. At certain stages of your life, you will be more financially exposed than at other times and a typical example would be when you are paying a mortgage to help buy your home.
What would happen if you were to die unexpectedly?
Term insurance is an affordable way of insuring against your death so that a lump sum is paid out in case of your sudden demise, so that there is enough money to pay off the mortgage and help support the family you leave behind.
Many people take out term insurance for the period of their mortgage, as there is often less need for a lump sum payout once you own your home outright after the mortgage has been paid off.
What’s the difference?
Understanding what life insurance cover is for is just one part of the equation and another key question is whether you should take out term insurance or permanent life cover.
Once you know the key difference between the two types of life insurance policy it will help you to decide which one is right for you.
Term insurance is a cost-effective option that involves paying a monthly premium throughout the duration of the policy and if you reach the end of the term, that’s it, there is no cash benefit and nothing more to pay.
If you take out permanent life cover you are taking out lifelong protection from the financial consequences of death and also taking the opportunity to acquire cash value growth in a tax-efficient way.
A key point as well is that the cost of your permanent life cover will not increase as you get older and the risk to your health increases. In contrast, if you decide to buy more life insurance once your initial term insurance expires you will often have to pay a much higher premium to reflect the greater risk you represent.
Term insurance is cheaper than permanent life insurance and it provides a great way to achieve financial protection, but if you want to take a more long-term view together with an element of wealth and tax planning, permanent life cover might prove the better option.
Once you know the key differences involved you will be able to make a more informed decision as to whether term insurance is right for you.