When purchasing life insurance, you will have to decide whether to purchase term or permanent life cover. Sometimes, you can even purchase a combination of both. However, understanding the differences and workings of the policy will help you know which one will be best for you. Below is an overview of the policies:
Term Life Insurance Policy
With a term life policy, a benefit is only paid if the policyholder dies. The policy can be taken for a number of years (terms), usually 10, 20 and 30-year terms. If you live past the term of the policy, neither you nor the beneficiaries you had designated get any money.
Benefits of Term Life insurance
Term life is the most basic insurance policy and is typically cheaper when the risk of death is low. The premium charged for a cover increases with the age of the policyholder and increasing risks. For most people, term life insurance is the best option since it allows one to choose the length or term and amount of coverage to purchase. The coverage amounts can range from £100,000 to several million pounds.
Term life insurance can be used to cater for short term needs. For example, you can purchase a policy that expires when your children finish college. This will ensure that your children continue with education should you pass on. Another example is with regards to your home mortgage. By purchasing a cover that expires at the end of your mortgage payments, you will be sparing your loved ones from the financial burden of paying for your debt if you die before clearing it.
Permanent Life Insurance Policy
A permanent life policy offers death benefits and a cash value, and acts as a savings account. If you survive the term of the policy, you will get part of your money back, which is usually be more than the amount you spend on premiums. You can get the money back by borrowing against the policy or cashing it.
Benefits of Permanent Insurance
Most financial advisors do not recommend permanent insurance. However, depending on your situation, the insurance can be right for you and also has a number of advantages.
For example, the policy premiums are guaranteed. The premium that you will pay when you start your policy will remain constant during the life of the policy. With term life insurance, your rates will rise over time or as your risk to death increases.
You can also use the money from a permanent insurance policy as a loan. The money that you contribute earns interest and you can cash against it or take a policy.
Choosing a Life Insurance Policy
Regardless of whether you decide to purchase a term life or permanent insurance policy, it is important to shop around to find a policy that is affordable. Contact different insurance companies and compare the premiums they charge for their life insurance policies. There are different factors that will affect the amount for premium you will pay. These include:
- Age: Older policy buyers usually pay higher premiums than those who are younger.
- Occupation: If you are in a hazardous occupation where death is likely to occur, you will pay higher premiums.
- Health: If you have existing chronic conditions, your rates are likely to be higher than that charges for healthy borrower
- Lifestyle: If you are a smoker, you will pay a higher premium than a non-smoker.
You should also determine the extent of cover you need. If you are looking to spare your family from a short term financial burden should you pass away, a term life policy will be best for you. A financial advisor can help you to determine the policy to purchase based on your current financial position and future needs.