Life insurance is another expense which
adds to the ever mounting bills in our everyday lives. Although daunting, tor
many it’s a necessary expense. Don’t worry, it can be affordable if purchased
smart. Here are some tips on how you can save on your life insurance costs.
Can I do without any life insurance at all?
You may think of life insurance as just
another unnecessary bill to scrap off your list. However, most people will need
some form of life coverage during their lifetime, especially if there are
children or other dependants involved.
There are some instances where you won’t
need any life insurance. This would be the case, for example, if you were
single, had enough saved to pay for your own burial and didn’t have any
children, spouse or other people in your life that would suffer financially if
you passed away. Even if this was the case, you may still wish to buy life
insurance anyway for other reasons, for example to help your parents out with
their mortgage.
How much life insurance do I need?
If there are loved ones in your life that
you need to protect, then life insurance is very important. Most people don’t
have enough assets (without debt/mortgage) to fully cover all their family’s
needs should they pass away. Some form of coverage is needed particularly if
you are the breadwinner in the family. You need to think of all the expenses
that would need to be covered, such as the mortgage repayments, your family’s
standard of living and even funds for college.
It’s important that you don’t try to save
on the cost by dangerously reducing your coverage. If you’re going to get
insured, get the right amount and then save by comparing plans and insurers
rates. There are plenty of tools and calculators online to help you calculate
how much coverage you actually need, so get this right to start from.
The amount should focus on two things;
immediate expenses and your family’s needs. Immediate expenses are basically
end of life expenses such as funeral costs, medical and estate settlement
charges. For estates under $1.5 million this figure should be at least $15,000
or 4% of the total value of the estate (whichever is the higher).
As for calculating how much income your
family needs, this is usually 60-70 per cent of the total income. It should be
enough to maintain their current standard of living. Don’t forget to factor in
your current savings, investments and retirement funds (at today’s value). If
your spouse will continue to work after your death, then this can reduce the
amount you need. If you’re unsure, see a qualified financial advisor to help
you with the calculations.
Term or Whole Life Insurance
When it comes to lowering your cost
of life insurance, the key message coming from today’s financial
experts is to buy term and invest the difference. What does this mean? Well,
there are essentially two main types of life insurance: whole life and term.
Whole life insurance includes an investment component. So, part of your premium
goes toward life insurance and the rest towards investments. This means if you
keep up a policy for 20 years, you’ll actually have something at the end of the
period (as opposed to term, where once the period is over, you’re left with
nothing).
This might seem ideal, but the truth is,
the fees involved with whole life policies are very expensive and you’ll either
need to sacrifice coverage to lower your premiums or pay high fees. The
investment part usually costs more than what you’d find with standard (non-life
insurance based) investments. This is why many experts recommend that you leave
your life insurance separate to your investments – because you can invest more
(lower fees) and get the coverage that you need at a lower cost.
Despite this general rule, there are
circumstances where whole life would be more idea. This is because these types
of policies don’t usually require a medical exam. If you have a medical
condition or you’re of an age which would make term too expensive or even
unattainable, then a permanent policy may be your better option.
