Life insurance is a big topic of interest. And rightly so, because we all need it! However, choosing the right life cover can be challenging. If you want to make the task of shopping for life insurance easier it’s crucial to understand how it works. So, in this post, I’m going to share the ins and outs of life insurance with you. Read through to the end and you’ll learn everything you need to know to make an informed decision.
A Little History Lesson on Life Insurance
I might be a numbers man, but I’m also partial to a history lesson every now and then. So, let’s get started by looking at the origins of life insurance.
Life insurance originated way back in Julies Caesar’s time in the Roman military when soldiers used to club together to pay for funeral costs when a fellow soldier was killed. They felt that if a soldier wasn’t given a proper burial their ghost would be an unhappy one and they didn’t like the sound of that! Furthermore, they would make a small payment to the soldier’s wife to help her out too. So, there you have it. Life insurance was born.
Fast Forward to Life Insurance Today
The life insurance industry today is a multibillion euro industry and the numbers behind it are a little more calculated.
Now we are bombarded with messages about how mortgage protection is not life insurance and how one company is cheaper and better than the other.
Let’s deal with some of the numbers behind the industry to see what makes the whole thing tick.
The Life Insurance Numbers Game
Life Insurance is a calculated product really. And how life insurance companies determine its price is similarly calculated. Life insurance companies look at the death statistics in a country year on year and determine a probability of a client’s death accordingly.
How about an example to demonstrate this?
A 45-year-old female wants life insurance for 1 year of €100k. The death stats show that only 0.0015% of 45-year-old females die at that age in that country. So, the starting price for this level of cover will be €150.
Then a life company will add profits, administration, margin for error, and so on. The price may end up being say €225 per year. The life company then hopes to get thousands of similar lives and – assuming the death trends continue – they make money.
What are the factors that affect the price of your life insurance?
You should be aware of the different factors that are considered when determining your life insurance policy. Run through this list before committing to anything in order to make sure you get the best value!
- Age: How old you are when you take it out is a big one. The younger you are the cheaper it will be.
- Sum Assured: This is the obvious one, the more cover you want the more it costs!
- Health: Prices for healthy people are less than for those people with medical conditions which may be perceived to mean that you are a riskier bet.
- Loadings: Life insurance companies will attach loadings or price increases for those who have medical conditions or in some instances risky jobs or hobbies but importantly different life companies attached different loadings so don’t just accept what one provider says. Shop around.
- Smoker Status: Premium increases for smokers are significant. You are considered a non-smoker if you have been off cigarettes for 12 months or more. You are again a riskier bet.
- E- Cigarettes: Some providers consider e-cigarette smokers to be non-smokers, some consider them to be a half smokers and others attached full smoker rates. If you are an e – cigarette smoker then its handy to know which providers consider you high risk and which providers consider you low risk.
- Term: The number of years you want cover for will of course affect the price. Some plans even offer cover for the whole of your life.
- Plan type: Life Insurance comes in two general forms, guaranteed and reviewable. Guaranteed plans have their premiums and benefits fixed from the start offering certainty. Reviewable plans allow the life company to amend the plans price/benefits as you get older so future prices/benefits are unknown. Not exactly the ideal financial planning tool!
- More and more plan types: Life insurance plans can increase, decrease or stay level. They can have extra benefits and yes, you guess it, these all affect the price.
Shop Around for a Life Insurance Plan that meets your needs
Now you have a sense of the life insurance industry and the various elements of it that determine prices. So, what should you do next? Take advantage of this knowledge.
If any of the above points have changed in any way it’s important to have a look at your life cover. If your mortgage amount has changed, if you have stopped smoking, if you are unmarried parents, if you have a reviewable plan.
Even if nothing has changed it is worthwhile reviewing your life cover. If there are discounts available from providers in the market you may simply move around and save yourself some hard-earned cash. Better in your pocket I say!
The important point is to shop around. Alternatively, use an independent financial adviser who can compare quotes for you. You will at least be certain that all of the above factors can be moulded to fit your circumstances rather than being shoe-horned into one providers’ so-called ‘perfectly designed’ plan.
When it comes to life insurance, one size does not fit all.
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So there you have it, life insurance uncovered. Watch this space for more on life insurance. My next post will look in detail at how to structure a life insurance set up around each household.
If you have any questions on this topic please leave a comment below and I will respond to you. I am always happy to hear from readers and find out what you want to know. In the meantime be sure to sign up for our Newsletter.