Which life insurance is best?Posted on: 13 May 2011 by Peter McGahan
I often get asked what life insurance my clients should take out - here's my advice on the best cover for you and your family
Q: I have been advised to take out some life insurance and have been given an option of a whole of life insurance or a term assurance plan and I don't know the difference. Also, which is the cheapest?
A: This could be a pretty easy question to answer. A term assurance is a life insurance for a set period of time. For example, you may have a ten year mortgage you want to protect in the event of death, so you set the life insurance for ten years.
A whole of life insurance is a plan that has no set term. So you might use this where you don't know when you may no longer need to be insured. Examples of this may be a couple starting a family who don't know how long they would like to insure for. Typically you would insure yourself until the youngest child is no longer financially dependent, so at the early stage of a family you may not know the answer to this.
Another example is to insure yourself against the cost of inheritance tax to protect your family in the event of your death, so they can pay the tax. At age 60 you are unlikely to be able to calculate your age at death, so you simply insure using a whole of life insurance which runs for, the whole of your life.
They are often sold as a plan that pays out if you die or pays out if you don't, but that's a little simplistic. There are two main types of whole of life insurance (I am simplifying here, which is why you will need independent advice, but this column could be a lot more boring than it is if I pad this out any longer!):
One is a plan that is invested and has a profit at the end; the other is a plan that has no profit. Typically, the whole of life insurance plan with no profit may have reviewable premiums at year ten, so you could see your premiums soar, but the plan with the investment content will potentially have guaranteed premiums throughout.
A term assurance plan is cheaper than a whole of life insurance as the insurer knows exactly what the risk is. They know they need to insure you for 'x' years for 'y' amount, whereas a whole of life insurance will protect you for a set amount for an unknown period of time, and if you pay your premiums all the way through, it's guaranteed to pay out the amount you are insured for.
So, expect to pay most for a guaranteed premium whole of life insurance, then a reviewable premium whole of life insurance, and a term assurance plan is the cheapest. If you know how long you need to be covered for, a term assurance is always best.
Watch out for a few quirks: If you smoke cigars or a pipe, some insurance companies do not class you as a smoker, so the cost saving is substantial.
With a whole of life insurance plan which has the investment content, it can reach an investment value where you can cease your premiums and the investment value will now pay your premiums, giving you a long premium holiday.
There is also a sort of insurance available, for example, within your insurance where some plans will pay all your premiums if you are unable to do your job. Others allow you to add on things like critical illness which pays out in the event you are diagnosed with a critical illness such as cancer, a heart attack etc but don't die.
There are many little quirks within these insurance plans and I am sure they are created for confusion and a dependency on people like me, but it's well worth the cost of independent advice to make sure the small print is correct and to look at the smaller than small print.
About Peter McGahan
Peter is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
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