The pitfalls of long-term life insurance
[social_share]Long-term life insurance is often a good option for a young family. However, there can be problems with such insurance and purchasers should be aware of these pitfalls.
Many people prefer long-time life insurance because of the certainty with the premiums, as well as the cost saving. An insurance company knows both the life expectancy and the expected payout at the start of the term, and so can set the premiums at that time. The premiums will generally remain the same throughout the policy’s lifespan.
There are also cost savings on long-term life insurance. This is mainly because it will have lower administration and marketing costs, reducing the premiums across the policy’s lifetime.
Long-term life insurance can also give a great deal of reassurance, as it will continue to cover the policy holder even if there’s an accident or an illness that decreases their life expectancy. Short-term life insurance would need to be renewed after such a health scare, and the premiums would likely increase dramatically. This increase doesn’t happen if the premium is fixed.
In the first few years of a long-term life insurance policy, the premiums will actually be considerably more than they would be for a shorter term policy. This is because the life expectancy at the policy’s end will be considerably lower than at the beginning. Because the long-term premiums are averaged over that time, they’ll seem higher at the start. This can cause a problem if the buyer has a low income, even if they expect it to grow as they are at the start of a career.
Another possible problem with long-term life insurance is inflation. If high inflation is expected, it’s a good idea to purchase a larger payout, although the premiums can be considerable.
Inflation makes it difficult to predict over the long term, so a payout can seem inadequate if inflation is high, or the premiums can be excessive if it’s lower than expected.
Another potential issue is that costs are locked into a long-term life insurance policy, as the early premiums are far higher than necessary. If the buyer has a change in financial circumstances, cancelling the policy will mean that they lose the value that’s in it. In these cases they can often sell the policy to an investor.
