Life insurance is there to offer support in worst-case scenarios. Many of us accept that those scenarios can take hold at any time, disrupting even the best-laid plans and leaving our nearest and dearest in a bad spot financially. But, when we’re stuck in the day-to-day routine, it can be very easy to push those worries aside and operate under the assumption that things are under our control, and Plan Bs aren’t a necessity.
But you can’t build a comprehensive financial plan without considering the contingencies. Building your savings, growing your pension, making the right investments and minimising debts are all excellent ways of strengthening your financial footing. If you neglect to put the right protections in place, you’re missing a key part of the equation.
But life insurance isn’t your only option, and some people may find that a different strategy for protecting their finances (and their household) is better.
What does life insurance cover?
It depends on the policy, but broadly speaking, a life insurance policy will provide a death benefit to be paid out to beneficiaries after you die.
This money can provide a vital lifeline for your surviving family. It is often used to pay off debts (or the remaining mortgage on the family), offset the impact of inheritance tax on the deceased person’s estate, or cover the loss of your income for a time. Some life insurance policies will also cover funeral costs, although, for obvious reasons, this does result in higher premiums.
There are, however, plenty of variables, and no two policies will be exactly alike for that reason alone. It’s imperative that you are guided by an independent financial advisor – not a representative who can only review the options they are paid to put forward to clients.
Your health, age, lifestyle, and the amount of money you want paid out to your beneficiaries will all drastically affect the premiums you pay and the benefits you see over the years.
You will also need to choose whether you are looking for whole or term life insurance. For some people, taking out a policy only during a specific period of their lives – for instance, up until retirement, until they pay off their mortgage, or reach a certain level in their education or career. For others, a permanent policy – one that will cover them indefinitely – is the better choice. It all depends on the purposes you have in mind for the benefit amount. The majority of policyholders have whole life insurance, but that doesn’t mean it’s the right fit for everyone
Some policies also enable you to borrow against the cash value accrued through your premiums, offering a growth opportunity that mirrors some other, more traditional investments. This can work for some people, although it may not represent the most profitable place to put your money – it all depends on the person and the policy.
What are the disadvantages of life insurance?
The obvious disadvantage is, of course, the fact that you need to weigh the ongoing financial implications against the long-term rewards. For many people, this is worth the expense, and the right policy will be one that fits alongside the rest of your financial obligations and goals.
Other disadvantages worth considering are:
The cash value of your policy may not match the ROI of investment opportunities into assets like stocks and bonds. While life insurance offers a relatively simple way to secure your family’s financial future, it’s not the only way to gradually grow wealth over time.
Making a claim on a life insurance policy can be complicated and, at times, slow. If the money is needed immediately, this can be stressful for the beneficiaries. This issue can be mitigated with good planning (say, by setting aside a small amount of savings for ‘tiding over’ until the benefit amount is paid), but it can cause issues for some families.
It may be considered a part of your estate when you die, which means that, if it pushes your estate’s value below the threshold (currently £325,000), the beneficiaries may not receive the full amount. There are things you can do to discount the benefit amount of your life insurance policy from your estate, but there’s no one-size-fits-all approach, and you’ll definitely want to speak to your financial adviser about the best solution.
It’s very easy to commit to the wrong policy. This isn’t like buying a pair of shoes or finding a good run-around family car – there are so many products on the market and picking the wrong one can mean saddling yourself with unnecessarily high premiums or limited coverage – or, worse still, it could mean misunderstanding the fine print and not receiving the type of coverage you need.
It’s only ever advisable to work with independent financial advisors who can apply their expertise to your unique situation, review the full spectrum of products that could potentially fit your needs, and give you advice that is free from bias.
Whether or not life insurance is right for you will depend entirely on your situation, goals for the future, and state of health. We can help you to decide what’s right for you – just get in touch with us when you’re ready to review your options.