What should you consider when setting up life insurance?

When setting up a life insurance plan there are several points to consider. We’ll look at three of the most important to get right.

The first thing to consider is the amount of life insurance you want (the lump sum that you choose to insure). With most life insurance plans you can choose any amount you like – so the actual sum of life insurance you get is totally over to you. Most people either use an online life insurance calculator, or discuss their situation with a life insurance adviser – both can be good options for deciding the correct amount of cover for you. Either way, common considerations are debt (for example using life insurance to take care of a mortgage), providing for family members (for example a replacement income), and proving for education costs for children. Once you’ve considered each of these areas, you will have a pretty clear idea of the amount of life insurance cover that is right for you.

The next point to consider is the type of life insurance plan you’d like. One consideration will be the type of premium to choose. When you start a life insurance plan you can usually choose “stepped” or “level” premiums (the stepped premium increases with age, while the level premium does not). The level premium will cost more at first, but in the long term will save you money. So deciding the kind of premium you’d like is important, as this could save you a lot over time. You’ll also need to choose if you’d like to add extra cover to your life insurance – for example it’s very common to have part or all of your life insurance pay out if you suffer a major health issue (like cancer, stroke, etc).

Finally, you need to choose the right insurer. With life insurance you are making a long term commitment – and so you need to select a financially stable insurer that is well priced and offers you as much flexibility as possible. While life insurance plans are similar, insurers can vary a lot – so selecting the right one for you is important.

How to choose the right amount of life insurance?

When setting up a life insurance plan you can usually choose any amount of insurance you’d like. So, how do you choose the right amount for you? We’ll look at five key areas people consider when choosing the right amount of life insurance.

Mortgages
For people with a family or who share a mortgage with a partner, life insurance is usually crucial. Most people in this situation choose to make sure they have enough life insurance to ensure their mortgage is paid off if they pass away.

Other debt
If you have debt that you would not like to be left to family or a partner, than including provision for this in your life insurance is a good idea. This makes sure that your partner or family are not left in financial trouble if you pass away unexpectedly.

Replacement income
This is particularly important for the main income earner in a household. If they were to pass away, there could be a huge financial impact on the other family members. For this reason, people often choose to add a sum for a replacement income into their life insurance. For example, a person might decide that they want to provide an ongoing income of $50,000 to surviving family for a period of 15 years (in many cases until children are grown). This makes sure that the financial impact of death is greatly lessened.

Education
A child’s education can be very costly. To provide for this kind of cost, an amount can be added to your life insurance – meaning that funds are available for education in the future.

Funeral costs
If you don’t have adequate savings for these, then you could choose to use life insurance to cover this expense. Also most life insurance plans have an immediate funeral grant – which can help with funeral and final costs.