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Life Insurance Planning

Life insurance planning is never top of anyone`s list for favourite things to splash out on, but with the increasing levels of debt most households are now carrying, life insurance is rapidly becoming a must-have for the family to be able to cope financially if the worst should happen.

However, there are many different types of cover on the market and whilst the choice can seem overwhelming, it is not that difficult to pick through the options once you understand the basic options available.

Types to consider in your life insurance planning

The cheapest and most widely available type of cover is term insurance which does not last forever, but pays out a lump sum if the insured dies within the policy term. It is possible to take out insurance for the short-term - five years for example - but it also possible to take out term insurance for as long as 30 years.

Term insurance does not usually have a cash-in value and if the policy holder does not die within the period of cover, the policy simply ends, with no pay out. Some policies offer the option to convert to a new policy at the end of the term, with no medical questions - and the new premium based solely on the age of the insured.

Whilst term insurance is cheap and cheerful, some people resent not getting a return for their premiums and prefer to pay more for their policy but receive a payout. The other disadvantage of term insurance is that no-one knows what lies in store and whilst you could be very healthy when you take the policy out, by the time it matures, your health could have deteriorated making it impossible to obtain cover elsewhere.

There are different types of term insurance available - with three of the main ones decreasing, increasing and level.

Level term insurance means that the sum insured will not increase in line with inflation - a cheap option but can mean that the value of the policy will lessen as inflation increases living costs. Increasing term insurance is slightly more expensive, as the premiums usually increase each year by a pre-agreed amount - either a set percentage or in line with the retail price index for example - but the sum insured also increases, effectively inflation-proofing the payout.

Decreasing term insurance is not suitable for family protection but if the cover is being taken out just to cover a loan, it can be a cheap and suitable option. As the value of the loan reduces over the years, so does the potential payout.

An alternative to term insurance is whole of life (WOL). WOL insurance is usually a fair bit more expensive because - providing the premiums continue to be paid - there will be a guaranteed payout of the death benefit, because the policy lasts for an entire lifetime, not a set number of years.

WOL policies also usually have an investment element, which whilst not the sole purpose of the policy, means that they do acquire a cash-in value over time. As they are designed for long-term cover, the surrender value in the early years is likely to be negligible, but over time can build up. There is no guarantee that the value will equal the amount paid in as only a portion of the premium is invested - the rest is used to pay for the cost of the insurance - but it is entirely possible.

Additional considerations in life insurance planning

When deciding upon life insurance planning, it is also necessary to consider whether you want to take out insurance jointly with your spouse and whether you want to add other health benefits, such as critical illness to the plan.

Having a multi-purpose policy with additional benefits and more than one life insured can work out cheaper than obtaining the cover separately. However, whilst having a policy that saves money saving money should not be the only consideration as getting the right kind of cover for your family is far more important.


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