One of the fancier financial products that gets offered out there in the world sounds something like this:
- “Buy this life insurance policy for your kids…”
- “BUT WAIT, THERE’S MORE!!!”
- “For only an extra <percentage> of your premium, you can get ALL YOUR CONTRIBUTIONS BACK in year 15, or whenever.”
There are a few variations on this. It’s quite popular to buy some kind of ‘unit-linked’ life insurance policy, where you get to decide how your premiums are invested – and at the end of a given time frame, the life insurance part lapses, and you get to keep the investment. Then there are plain-old premium refunds after a period, while the life insurance policy continues after that. However it’s packaged, you’re essentially buying two things:
- Life insurance; and
- An investment product.
They’re just packaged together.
The question I’m often asked: “But are they a good deal?”
Here’s my standard response:
So unfortunately, the answer to your question is “that depends”, because:
a) Life insurance is complicated; and
b) The insurer is working out the premium policy based on general probabilities, while you’re working out whether the policy fits within your specific, individualised life plan.
That said, my experience of these products is that they are a good deal, but they usually come with a catch: if you miss a single premium, the benefit falls away.
Insurers know that most people will cancel or reduce their life insurance in times of financial difficulty or stress, so they’re able to offer an extremely attractive product – all the while knowing that most people will pay the higher premiums at first, and then bow out at some point (because they lose a job or go into excessive credit card debt or something). After all, if you don’t have enough money for your child’s school fees, you’re hardly going to prioritise a life insurance policy premium.
And when the insured person stops paying, or changes their policy, then the insurer gets to keep all the premiums and not pay anything out.
So the point is this: if you are going to go down this route, it really should be a full-on commitment that you never renege on.
You could also always just save the ‘extra premiums’ yourself – but it requires a discipline that not everyone can maintain.
Just, you know, throwing it out there.
Happy Friday, people.