Life insurance is intended to protect your family and your property in the event of your death or debilitating sickness.
If disaster strikes during the term of life insurance payments, dependants will get help to meet bills and payments. Alternatively, they could get a lump sum to pay off things like a mortgage.
Permanent life Insurance:
Permanent life insurance is the base form of life insurance, its purest form, and is also known as Whole Life Insurance. An insured person pays a fixed rate to an insurer over their lives, and the insurer will pay out a predetermined amount upon the insured person’s eventual death. the issue with this is that each case has an almost guaranteed payout for the insurer, so the premiums are quite high compared to other kinds of life insurance. This also has the downside for a long term customer due to the fixed rate. For example, if a person pays a fixed rate of £10 a month for 5 years before dying, they will have paid £600 in total, for a predetermined payout. If they had lived for 40 more years, they will have eventually paid out £4,800 for exactly the same payout.
Advantages of Permanent Life Insurance:
- There is a guaranteed payout, assuming the insured keeps up with the payments.
- Dying early means the insured gets more for their money! Every cloud…
Disadvantages of Permanent Life Insurance
- Living longer means you get less for your money.
- Once you have begun payments, stopping paying will result in no cover payments upon your death. The payout depends on the insured’s constant paying during their life.
Term based life insurance covers a person for a set amount of time, for which their family will receive the payout, IF they die within that term. If they don’t die however, they will have lost out on their premiums that they paid and will get no returns. Term Insurance is further divided into three types, Level-Term Insurance (LTI), Decreasing-Term Insurance (DTI) and Family Income Benefit.
LTI sets a specified sum that the policy holder is covered for throughout the term. If they die within the term time, their beneficiaries will receive that lump sum to invest or live off, however they like.
DTI sets a starting sum that will be paid out upon death, but this then decreases as the term progressed. The point in this is that it is aimed at paying off a debt, such as a mortgage which will decrease over time. The advantage is that the premiums that need paying are much cheaper, due to the decreasing payout.
Family income Benefit is another kind of Term insurance, in which the insured’s dependents are paid an income based upon the insured’s salary when they die. The family are paid the income for the remainder of the term. This means if the deceased family member was earning £3,000 a month and the term lasted for ten years, and they died two years into the term, then the family would get paid £3,000 a month for the next 8 years. However, this can work against the policy holder if instead they died 9 years into the term, then the family would only get £3,000 a month for the next year, meaning that they miss out on a large amount of potential payout and lost premiums.
Advantages of Term Insurance
- Lower premiums to be paid
- Can receive payouts as a salary rather than a lump sum which may be more helpful to some people who do not want the hassle of trying to invest a large lump sum.
Disadvantages of Term Insurance
- The total payout varies depending on the insured’s time of death in regards to the length of the term.