Four ways to save on life insurance costs
5 min read
There are ways to keep costs down while still getting a life insurance policy that meets your needs.
There are some things in life worth paying for: good shoes, chef’s knives and a comfortable mattress. These are essential items that you use every day, so it makes sense to spend a bit more for quality that lasts.
But what about your life insurance? It won’t benefit you while you’re around to enjoy it, but it gives financial security to your loved ones when you’re gone, so it’s an important investment in their future. For that reason, it’s not something you want to skimp on.
Here are four tips to help you save on life insurance costs.
How much life insurance cover do I really need?
Finding the right balance when setting the level of your life insurance cover is important.
A modest level of cover means more affordable payments, but the amount your family will receive might not be enough to support them adequately when you’re gone. Think about what you want this money to do – is it to pay off the mortgage, cover household bills, fund your kids’ education or pay for your funeral? This will help you reach a suitable figure for your circumstances.
You could also try using a free online calculator to work out the right level of cover for you. The calculator will take into account how much you have outstanding on a mortgage, any other debts, the age and number of your dependents, and whether you have any other life insurance. It will also consider if you have any benefits through your employer, like death in service benefit.
Term or whole-of-life cover?
When you’re choosing life insurance, you’ll be asked whether you want a term or whole-of-life policy.
Term life insurance only pays out if you die within the term of the policy, meaning a certain time period, say, 20 years.
There are different types of term insurance, such as:
- level term - the payout stays the same throughout
- decreasing term - the payout reduces over time
- increasing term - the payout rises over time and is linked to inflation
Whole-of-life insurance simply pays out a fixed lump sum when you die, whenever that may be. Typically, term insurance tends to be more cost-effective than whole-of-life cover, which will almost certainly pay out at some point, as long as you keep making your premiums. Term insurance might be enough for you if you only need to be covered by a policy while you still have a mortgage to pay, for example, or while your children are still living at home.
Consider decreasing cover
Decreasing cover, as the name suggests, is when the level of cover reduces over time.
It can also be called mortgage life insurance because it’s meant to cover your repayment mortgage, which should get smaller every year as you pay it off.
This type of cover will be cheaper than a level term policy, which just pays out a pre-agreed lump sum that doesn’t change throughout the term of your policy.
Reviewable versus guaranteed payments for life insurance
There are a couple of options when setting your insurance payments.
Reviewable payments can go up, while guaranteed payments are fixed and won’t change.
As a rule, younger people get cheaper life insurance. So if you take out a policy early in life, you’d probably save money over the length of the policy by choosing guaranteed payments. While payments might be slightly higher than on a reviewable policy, you won’t risk them becoming much more expensive in years to come.
For everyone else, a policy with reviewable payments might be cheaper initially, but you take the risk that the cost could go up later. Typically, an insurer will assess your policy every five years and decide whether to raise your payments. It’s a bit of a trade-off, and the type of insurance which will save you the most money will depend on your personal circumstances.
Consider taking professional advice from a financial adviser if you are struggling to find a policy that suits you at a price you’re happy with.
Hannah Smith is a freelance financial journalist with a background in the trade press. She writes about personal finance, asset management and business for titles including Money Observer, Shares, FE Trustnet and MoneyWeek.
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