When's the Best Time to Take Out Life Insurance?
Life insurance is essentially, a gamble. When you take out a policy you will pay monthly or annual premiums, the price of which will depend on your insurer’s calculations of the likelihood of your death during the length, or ‘term’, of the policy.
The price will also depend on certain lifestyle factors such as whether or not you are a smoker and, in many cases, your profession. Of course, the only way in which your insurer will pay out is if you die or, depending on your policy, if you are diagnosed with a critical or terminal illness. If this does not occur during the term of the policy, then you will simply have been paying for the reassurance factor.
SafeguardGenerally, the sole reason for taking out a life insurance policy is to safeguard your family and dependants’ futures after your death. You, of course, will not gain financially from paying for a policy until you die, and so you being insured is of considerably more direct concern to those around you than it is to you personally. This should inform your decision as to whether or not it is the right time to take out a life insurance policy.
When you take out a mortgage, almost every lender will try to persuade you to pay for life insurance at the same time. They are concerned that their money will not have to be written off if you were to die before having paid off your mortgage, and will encourage you to think that you need the ‘peace of mind’. However, it is worth thinking hard before you make this decision.
Life insurance is only of use to those who have financial dependants. If there is nobody who relies on you financially, then there is little point in paying for life insurance; if you have a mortgage but no spouse or children, your mortgage lender may be forced to sell your house after your death in order to recoup their money. But if it is not a family home, then this outcome seems to be of little consequence. For those in this situation, it would often be far more sensible to put the money that would be being spent on premiums into savings, or a pension scheme.
Outstanding DebtsIf, on the other hand, you have financial dependants, then life insurance is an absolute must. The rule of thumb is that you should be insured to at least the point at which your surviving dependants would be financially capable of paying off any outstanding debts. More than half of all mortgage-holders who are also the main breadwinner are either under-insured or have no life insurance at all; following this path can, and often does, lead to the surviving relatives being forced to sell the family home as a result of an inability to make mortgage repayments.
Having established that, if you have financial dependants, life insurance is a necessity, you must now ask yourself how much cover you need. This is addressed in more detail elsewhere on this site, but you should remember two main guidelines: you should possess enough cover to ensure that your dependants can cover your debts, and be provided with a reasonable income. However, over-insuring yourself is also a mistake; you may well find that, rather than paying large premiums for a large payout, you may be better-advised to settle for a smaller payout and put money you are saving on the premiums into a low-risk investment such as an ISA.