Life insurance is perhaps the ultimate form of squirreling away money, a long term strategy that can help protect your loved ones financially even after you have gone. However, despite the name, life insurance need not be an investment that you will never see the fruits of yourself. Here we look at some of the different classifications of life insurance on offer from providers like Santander. We will then look at a hybrid version of life insurance that also performs like an investment vehicle.
Whole of life insurance, or life assurance, is the kind of product that most people think about when new to this topic. The most expensive form of life cover, these policies will eventually pay out when you die, providing that you don’t void the policy through a proscribed terminal event like misadventure. Since the policy will eventually result in a claim, the insurer must set the regular premium payments higher than for more limited forms of life insurance that do not necessarily always pay out.
In general, these cheaper policies are called term life cover. The term denotes the period of time during which your death will be covered. Survive the term, and the contract is over – no claim on the policy will be possible, hence the reason that premiums can be offered cheaper as many are statistically likely to survive the term. Term life cover is frequently used to cover large debts like mortgages. The cheapest of these kinds of policies is decreasing term life cover, with the term and sum insured set to track the time and money it will take to pay off the mortgage.
However, the affordability of term life insurance is of course offset by the fact that longevity will result in an inability to claim. Regular premium payments therefore only buy limited financial security for your dependants, after which the money put in will simply be water under the bridge. This is where the hybrid of endowment life cover can offer more of an investment solution.
Endowment life cover behaves like term life insurance during the specified term. However, when the term finishes the product matures, just like a regular endowment investment product. As with all endowment policies, growth can be negative as well as positive, and is dependent on the performance of the investment fund. However, even very poor growth will usually return at least some of the money that you put in over the years, much more of an attractive option for the avid squirreler!
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The “investment” component of a whole life insurance policy is usually a terrible value. The first year of premeiums are essentially confiscated for the sales comission. After that, the “equity” builds up very slowly. And, the death benefit is usually way too small to be useful to your spouse in the event of your demise. Worst of all, you don’t get both the equity and the death benefit. You only get one or the other.
Most people are way better off getting a term life policy. This will allow them to be able to afford a policy with a high enough death benefit to cover the loss of income. If you want to build up equity, you can always invest the difference you would pay between term and whole life in a mutual fund.
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