When it comes to planning for the future, many people struggle with deciding between life insurance and a savings plan. Both options offer financial security and peace of mind, but which one is truly the better choice? We'll look at the main differences between them, as well as which is ultimately better to have.
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What is the difference between life insurance and savings plans?
Life insurance and savings plans are both essential tools for securing your financial future, but they serve different purposes.
Life cover is a policy designed to provide a financial safety net for your family/loved ones in the event of your death. It offers a lump sum payment, known as the death benefit, to your family/loved ones. This could be used to help cover expenses such as your funeral, outstanding debts, and living expenses.
With this type of protection, you pay a premium either monthly or annually to maintain the policy. In return, your beneficiaries will receive the payout if you pass away during the term of the policy. Or if you have a whole life policy, it will pay out regardless of when you die.
Savings plans are a way to set money aside to achieve financial goals or create a safety net for unexpected expenses. Savings plans can come in various forms, such as an ISA, pension plan, or simply a dedicated savings account.
The main difference between the two is that life insurance provides a payout when you die. While a saving plan allows you to accumulate money over time for various purposes, such as retirement, large purchases, or emergencies.
When is life insurance a better option?
Put simply, if you want to ensure financial protection for your family in the event of your death, life insurance is the better option. Life cover provides a guaranteed payout, giving your family/loved ones financial support during a difficult time.
It’s a particularly important form of protection if you have dependents who rely on your income to cover costs, such as mortgage payments. It also serves as a way to clear any debts or loans you may have, ensuring that your family/loved ones are not burdened with financial obligations.
They can also use the money towards your funeral costs, which can be expensive. This will help prevent them from having to use their own funds or even have to dip into their savings. Or if you have a mortgage, you can use your policy to help your family pay off the remaining balance in your absence.
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When is a savings plan a better option?
While savings could be used to help your loved ones if something were to happen to you, a savings plan is typically suited for achieving financial goals or just to have some security.
It's beneficial for those who want to save for specific goals, such as buying a home, starting a business, or funding their retirement. If you intend to leave your savings account to your family/loved ones, you'll need to write a will to ensure they receive the funds. Then, when you pass away, the executor of your estate will distribute the funds according to your wishes.
If you are unable to take out life insurance due to your age or health, a savings plan could be your next option. That said, there are still options for cover, such as guaranteed life insurance, which doesn't require a medical exam.
What about income protection?
Another financial product to consider is income protection insurance. This can provide a monthly payment if you are unable to work due to illness or injury. With this, it can help cover regular expenses, such as a mortgage or rent, utility bills, and other living costs while you focus on recovering.
Income protection is particularly important for those who are the main earners in their family. Or those who don't have a substantial amount of savings to fall back on in case of a sudden illness or injury.
Is life insurance better than a savings plan?
The answer is clear - life insurance offers a level of protection, but so does a savings plan. With life insurance, the payout is secure - so long as you continue to pay your monthly premiums. If you have a policy like decreasing term life insurance, the payout will decrease over time, but there will still be a guaranteed amount for your beneficiaries.
Additionally, most life insurance policies offer cover from day one, so you could receive a full payout if you passed away at any point after taking out the policy (within the term for term policies).
On the other hand, a savings account is subject to market fluctuations and interest rates. You also don't know what events could occur. For example, what if there was an emergency or you lost your job? You may be forced to dip into your savings, leaving less for your loved ones in the long run. It may also take you a while to build up your savings, potentially leaving your loved ones more vulnerable in the early days.
Whereas with life insurance, the payout stays put regardless of any personal financial setbacks you may face. You can also protect the policy from inflation with cover types like increasing term life insurance.
Please note: The insurance products offered by Cavendish Online have no cash-in value at any time. If you stop paying your premiums your cover will stop, your policy will end, and you will receive no benefit. If you have not claimed before the end of your chosen policy term, the policy will end, and no benefit will be paid.
Unsure about your options?
We all want to protect our family/loved ones but it can be hard to know which financial product is the best option. If you're unsure about whether life insurance is the right choice for you, our expert advisers can help discuss your options.
Or if you wish to buy a policy, but are unsure about the type of cover you need, they can help guide you through the different options available. Speak to an adviser today.
If you already know what you need, you could get a quote within 30 minutes through our online quotes service.
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