Here is the sad truth about cheap life insurance – Most people who purchase life insurance don’t hang on to it for much longer than seven years they say. That’s because insurance just becomes too blinking expensive after 3 or 4 years and we’ve got no-one to blame but ourselves.
How can it be your fault?
Well its like buying a car with a balloon payment at the end. You pay through your nose for the car every month, and after 5 years you still owe a boatload of money on it.
But I’m running off track now…let’s get back to life insurance and take a look at the two kinds of people who buy life insurance:
- The first person wants as much life cover as possible at the cheapest possible price (Sound familiar?). Maybe they’ve applied for a bond and need life insurance in order to get it approved? Who knows? But regardless, they need the cover as in yesterday.
- The second type of person has a longer time frame in mind. They are concerned about two things – will they still qualify for cover in the future and will they be able to afford it in future
Let’s take a look at the person who needs the most life insurance at the cheapest possible price…
There’s nothing wrong with this by the way. Maybe you’re sitting with tons of debt, on a tight budget, and you don’t want to leave your loved ones with debt? For you the following financing options make perfect sense:
- 5% compulsory annual increase in premium, or
- Age-rated compulsory annual increase in premium.
Basically, a 5% compulsory annual increase is one where the cost of your life insurance increases with a fixed 5% each and every year even though the amount of cover stays the same each year.
An age rated compulsory annual increase is based on the age band you fall into. So for example, a young person might start out with a 2, 5% increase each and every year for the first 5 to 10 years. Therefore the next 5 to 10 years their premium might increase at 5% a year, and so on and so on. Once again the cover stays the same each year.
These funding patterns allow you to buy the most life insurance upfront at the lowest possible price. Problem is, after 5 years the increase in premiums starts to outpace your annual increases in salary (especially if you’re coming to the end of your career). So what do we do? We start shopping around for cheaper life insurance.
That’s where level monthly premiums come in. Level premiums are initially more expensive, but definitely cheaper in the long run. That’s because the cost of this life insurance does not increase year after year. Your salary (hopefully) will and soon starts outstripping what you’re paying for the life insurance.
The first step when deciding on how to finance life insurance is to decide on what you want.
If all you need is to cover debts then the compulsory increases make perfect sense, but you need to realise it only giving you breathing space. In as little as 3 or 4 years it’s going to cost the same as the level premium option and then continue increasing. Of course, you can always shop around for cheaper life insurance at that point, but what do you do if no insurance company wants to touch you?
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