The money that you pay for life insurance serves no purpose unless the dreaded reason for taking it actually happens. Then it suddenly becomes valuable. The one thing that no one can predict is when they will die or how long they will live. If you have family or dependents you need life insurance. Even if you only require cover for burial costs, you will need life insurance. That is unless you are already quite rich!
Given that you need life insurance, how can you maximise the cover and minimise the cost? As insurance is not an investment, you minimise what you spend on life cover and maximise your investments. An investment can be of value to you while you are still alive. Minimising your life insurance spend should not be at the expense of adequate cover.
The cost of life insurance is influenced by the type of policy, commission payable and the risk margins and administrative expenses levied against the policy.
Less obvious are the cost of non-disclosure that result in repudiated claims and penalties resulting from the early surrender of a policy.
Take all of these into account when buying life insurance.
Don’t consider suicide as a means of providing for your family. Insurance policies contain a suicide exemption clause – they won’t pay.
> Tip One. A big investment portfolio means less life insurance.
Your entire investment portfolio should be balanced to include investments in equities, property, retirement funding and life insurance. Life insurance is there to cover a shortfall of income should you die. As you investments grow, the need for life insurance diminishes.
> Tip Two. Compare the expenses disclosed by various insurers. Compare what different companies offer for the same premium.
Life insurance is a bet against the insurance company. The sum insured is the amount at stake. You only win if you die. The premium is calculated according to the probability of death based on statistical mortality tables. This provides the actual risk to the insurance company which will add its own risk margin. The size of this margin may vary. If you can find out the size of the margin you can save.
Administration expenses and commission are factored in. These may vary. Local legislation may compel insurance companies to disclose certain expenses and commissions.
> Tip Three. Take term insurance and use the money saved on lower premiums to finance investment.
The type of life insurance selected will have a major bearing on cost. Term insurance is the cheapest. Whole life policies which include investment are much more expensive.
Term Insurance provides fixed cover for a specific time period or to a specific age. It is the most cost-effective of the life products. The premium is calculated for the entire term and the premiums are smoothed so as to remain the same throughout the life of the policy. Brokers and insurance companies prefer the more complex products which are more profitable and produce more commission.
Even cheaper is decreasing term insurance. Decreasing term insurance is usually taken to cover a mortgage bond for a specific time period. It can also be used to provide for a shortfall in your growing investments. The amount of life cover decreases over the term of the policy so that there will be enough to cover the outstanding loan balance or the investment shortfall.
Whole Life Insurance is much more expensive but will provide cover until death as long as premiums are paid. The growing investment portion is used to offset the cost of life cover. The cost is calculated according to the insured’s life expectancy at the time of commencement of the policy. Commission on whole life policies is very expensive and impacts on the investment value. Life policies are not good investments, and this type of policy should be avoided. Use the cash saved to invest in equities, bonds and property.
> Tip Four. An independent financial adviser may provide more objective advice than a commission driven broker or agent.
Most people buy life insurance products though a broker. If you have a broker that you trust, then ask for a number of quotes from different companies. An independent financial adviser that charges a fee will probably provide more objective advice. A broker will generally (but not always) try to sell a policy that pays the highest commission. Of course, you still have the choice and will not have to pay a consulting fee. Be sure that you know what cover you require. A “needs analysis” will provide you with the lump sum required in the event of your death.
> Tip Five. Negotiate a lower commission or a spread commission option.
Find out how much commission you will be paying and whether the commission is paid upfront or spread over the life of the policy. Upfront commission is very expensive. Spread commission is generally preferable. Try to negotiate a lower commission!
> Tip Six. Compare, compare, compare!
Ask for information about cashing-in and surrender penalties. These apply particularly to policies that have an investment element. Circumstances change unexpectedly and you should not have to lose everything.
Get a lot of quotes for each type of policy. Different companies have different formulae for calculating expenses and risk margins. The risk margin may be anything from 1% to 100%. Some companies are simply more greedy than others.
Get quotes from direct insurers and compare these. Direct insurers save large amounts of money on commission but may add extra margin for themselves! One “direct insurer” company quotes a premium that is fifty percent higher than a policy that pays commission for the identical cover. The “direct” company relies on the assumption that it is cheaper.
> Tip Seven. Ensure that you have disclosed EVERYTHING!
Disclosure is crucial when it comes to insurance. Failure to disclose something material to the insurance could result in the loss of all benefits! Non-disclosure is very expensive and must be avoided at all costs. Nothing is more expensive than a policy that has no value on death!
* Tip Eight. Do not allow your policy to lapse!
If you stop paying your premium on term insurance, or before there is any value in the investment in a whole life policy, the policy will lapse. If you are now older the same insurance will cost more. If you have suffered from any health setbacks in the interim, the new premium will skyrocket.
In summary, remember that the purpose of life insurance is to provide for a cash shortfall if and when you die. The more investments you have, the less life insurance you need. Term insurance – especially decreasing term – is the cheapest. Don’t take out more expensive non-medical cover unless you are planning to die soon. Investment should not be part of a life policy which attracts huge commissions. Life insurance is a bet that favours the insurer. If you don’t die you lose. Minimise your life cover and maximise your investments. Remember, your investments will be available even if you live! Compare what different insurers offer for the same cover and finally, disclose everything on the medical form.