Life Insurance or Savings?

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Should I buy life insurance or focus on savings?

It is a key worry for many of us as we strive to provide security for our family – what are they going to do to pay the bills when I’m gone?

Life insurance offers a system to cover this eventuality – it was designed to answer that very question, but in today’s climate, is it better to just accept the concept and purchase a life insurance policy, or look into alternative ways of putting money aside with savings?

Life insurance vs. savings – the basics

Both life insurance and savings can result in a lump sum being left behind for your loved ones. The difference mainly lies in the level of guarantee and how early the money is needed.

For a very basic example, let’s suppose you put £50 per month towards each idea – one a decreasing term life insurance policy set to pay off a £120,000 mortgage (£500 per month at 2%), versus a simple savings policy with a decent 3% rate of insurance. 

After one year – total paid in: £600

• The life insurance policy will pay out the full amount required to clear the mortgage of around £116,500.

• The savings account will have a little under £610.

After five years – total paid in: £3,000

• The life insurance will pay out the remaining amount to clear the mortgage of approx. £101,000.

• The savings account will have around £3,240

After ten years – total paid in: £6,000

• The life insurance now covers the remaining mortgage of £80,000.

• The savings account has grown to a touch over £7,000

After 20 years – total paid in: £12,000

• The life insurance still covers the mortgage, now standing at £31,500.

• The savings account has almost £16,500.

After 25 years – total paid in: £15,000

• The life insurance covers the remaining mortgage, now a little under £3,500.

• The savings account is over six times more valuable at £22,500.

After 26 years – total paid in: £15,600

• The decreasing life insurance term has ended. The mortgage is fully paid off and nothing remains to be covered.

• The savings account holds a reasonable £23,646.

Using this very simple example of the most typical use of life insurance against a similar amount paid into a basic savings account, it is easy to see that for at least the first two decades, the life insurance policy provides a far better level of security than savings.

The advantages of savings

It’s not always the case that life insurance is simply better than a savings account. Depending on your needs, some of the advantages of a savings account may be very important. Not the least of these is the ability to access your money early – with a basic life insurance policy, there is no opportunity for you to take out funds.

The second main advantage to a savings account is the freedom to miss payments. With a savings policy, you choose how much and when you are going to deposit amounts - but missing a payment on your life insurance can result in the entire policy being cancelled and everything paid in thus far becoming lost.

It is very important to always keep up your regular payments to your life insurance policy. If you are struggling with it, contact your insurer right away and discuss the possibility for a premium break (also known as a payment-holiday) to cover the difficult financial period. Never simply allow a direct debit to go unpaid.

Speak to our advisors to find out more about covering periods of difficulty with your life insurance.

The best of both worlds – endowment life insurance policies

An endowment policy is a life insurance policy which pays out a lump sum at the end of the term. Historically, they were mainly used to cover interest-only mortgages, and with the decline in use of these mortgages, so too has the endowment policy seen a drop in popularity. Despite this, however, many providers still offer such a policy and for anyone interested in building a retirement nest egg to go alongside their life insurance, they provide an excellent middle ground.

It is easy to feel that a life insurance policy which reaches the end of its term without being needed is a little of a waste. The level of security that has been enjoyed during the decades of its cover forgotten – for some, living through their policy term can feel disappointing (even though the alternative is always worse!).

Providing a cash injection upon maturity, endowment policies offer something significant to look forward to throughout the insurance term – and as they often coincide with the mortgage being finally paid off, a celebration is definitely due!

Investing your money

By giving the life insurance company your money to invest during the term of your insurance, your money can grow at a much higher rate than any high-street standard insurance. Though it comes with a little risk (as all investment policies may suffer losses as well as gains), the level of experience and professionalism that the investors have means that on the whole, investments tied to a reputable insurance company are a very enticing opportunity.

Dividends on investments can be added to your endowment policy as well, helping it increase in value over the years, or they can provide a backup – paying a monthly premium to help with difficult financial periods or just give a little ‘time off’.

While an endowment policy ties up your money and doesn’t offer that freedom of being able to withdraw funds easily along the way, it can provide a substantial reward upon maturity and is worth considering as a life insurance option.

Save smart – convenience, growth and security

Balancing your financial options is a matter of choosing the right ratios between convenience, financial growth and security for you and your family. A high-street savings account can offer the finest in terms of risk-free slow growth and convenience, with immediate access to savings and a fixed interest rate to guarantee return.

At the far end of the spectrum is building an investment portfolio, which requires work and research and a willingness to lose it all in order to gain massively when everything lines up.

Combining life insurance with managed investments in terms of an endowment policy strives to find a solid middle ground, suitable for people with a greater level of financial understanding, but who don’t want to find themselves pouring full-time hours into maintaining an array of stock.  

For most, with a family to support and a desire to reach retirement financially stable, these extended life insurance and investment opportunities provide the ideal package.

For the best life insurance or help saving money with your life insurance policy, give our expert advisors at Quick Quote Protect a call.