Wednesday, 09 January 2008

Are the benefits of life insurance worth the high premiums?

Life insurance can be expensive but it is an absolute necessity. There are a number of options available to manage that cost. One of these is low cost term life insurance. Other options may include finding the best deal by arranging for a variety of life insurance quotes and negotiating a lower commission from your broker.

John and Myra were in their early thirties with a three year old son and a one year old daughter. They had bought a new house and are building their lives. John's career is beginning to take-off and Myra is a stay at home mum. She has some part-time work that provides a little extra. She plans to resume her career when the children are a little bigger.

One evening Myra hears the door bell ringing. It rings again. It is the police. Myra hears the bad news. John has been killed by a hit and run driver in heavy rain on his way back from work. She is devastated. The family rally round.

After the funeral it slowly dawns on Myra that she has no resources with which to carry on. Even the funeral costs will be a drain on her limited resources. The mortgage repayments alone will take up more than her salary. She has been dealt a double blow. The life insurance that was deemed too expensive just a few months ago would have kept the family on their feet. Now what?

Over the next few years Myra may be able to overcome the financial blow. In the short term funds are required.

Life insurance is similar to pouring money into an empty hole until something happens to justify the cost.

Life insurance should be only a part of a balanced financial portfolio. The portfolio should include investments and savings. If you cannot afford the cover recommended by the broker then take less. As the investments grow, the need for life insurance diminishes.

One solution which minimizes the amount spent on life cover is a life policy that includes an investment portion. A variable universal life policy is a good example. As the investment grows, the amount of life cover reduces. The policy allows flexibility - additional funds may be invested to boost the investment, or the premium reduced to cover only the risk when times are tough. After a few years the policy provides a useful cash value.

The main objection to this type of policy are the expenses associated with it. This includes hefty commission. What it does ensure though is that the funds cannot easily be drawn in the early stages - a problem with most investments.

An alternative is to take term insurance. This should be coupled with a separate investment and the discipline to maintain the investment.

Life cover is expensive. One of the reasons for this are the high commissions paid to the sales-people. But life insurance is necessary. Shop around and find an affordable option. Even if you cannot afford the cover you need, remember that some cover is better than none.

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