10 Life Insurance Alternatives: Smart Choices to Consider

Life insurance is there to provide a financial safety net for your loved ones should you die sooner than expected. The money can be used to pay for your funeral, the mortgage, or help with general living costs.  

If you feel that life insurance is too expensive, you don’t qualify (perhaps due to pre-existing health conditions), or simply feel it’s not the right product for you, then there are 10 life insurance alternatives you could consider.

Top 10 life insurance alternatives:

Here are 10 life insurance alternatives if you failed to get life insurance:

Income protection insurance

Sometimes referred to as permanent total disability, income protection insurance pays tax-free, monthly income if one is unable to work for an extended period due to illness or injury. It is offered in packages of 12-60 months and can provide up to 50-70% of your income. However, when applying for the claim; there is a waiting period of between 4-26 weeks before you are eligible for payments.

Some individuals may be using the riders to get income while they are alive and this is the main reason most people think of life as the death benefit. There are still life insurance alternatives options that can fulfill those needs if you cannot get or renew a life insurance as income protection insurance.

Key Features:

• Provides a monthly, tax-free income if you are forced to stop work for health reasons.
• Covers all conditions, so long as you are medically signed off from work.
• Payments run until you return to work or reach retirement age if you choose a policy with long-term cover
• Short-term cover typically pays out for up to 24 months but can be either 12 or 60 months.
• Usually, a delay before you start receiving payments, with the deferral period often set at 4, 13, or 26 weeks. 
• Typical payouts are 50%-70% of earnings – insurers will not cover your full salary, as an incentive for you to return to work if you can.
• You can make multiple claims throughout the policy term.

Critical illness insurance

Critical illness insurance pays a tax-free benefit if you are diagnosed with any life-threatening diseases. Compared to income protection insurance, its main objective is to deliver income rather than offer a lump-sum payment in case of death. Some policies are beneficial in that, unlike income protection insurance, there is no waiting period, therefore you can go ahead for life insurance alternatives  and use the funds for the costs of treatment or to provide an income while you are attempting to recover from the illness. The limits are flexible but usually range from $5,000 to $75,000 depending on the premiums that are spent on the policies. Low premium policies will carry less of your benefit and come with a small list of the illnesses for which the policy will pay, while those priced more expensively will offer you a higher benefit and the list of the illnesses that the policy will compensate for will be longer.

Key features:

• Pays out a lump sum after diagnosis of a potentially life-threatening illness.
• Conditions for making a claim are more limited than with income protection insurance. Policies normally cover around 50 conditions, although different insurers could offer more or less than this.
• Policies can last as long as you want, although many people choose to have coverage until their mortgage has been paid off or children have left home.
• It pays out once, after which the policy ends.

Mortgage protection insurance

Mortgage protection insurance helps repay the remaining balance of your mortgage in case of death or if you are unable to work due to disability. The payout pays both the principal and interest on your mortgage but if the insurance money goes directly to your mortgage company there will be no money for the family. This means basic costs for property taxes, homeowners insurance, HOA charges, etc shall still be paid. However, you may be able to secure an endorsement on your policy that would allow the coverage of such costs. These costs may be as low as $5 or as high as $100 monthly, and they vary by your age, the number of years remaining on your mortgage, and your balance.

Key features:

• Clears any mortgage debt if you die during the term of the policy.
• Money is typically paid out as a lump sum.
• Payouts are free from inheritance tax as long as the policy is placed in a trust.
• If you have a repayment mortgage, the monthly premiums go down over time to reflect the fact that the debt will be falling too.
• If you have an interest-only mortgage, a policy paying a fixed sum that doesn’t decrease over time could be more suitable.
• Your policy should be reviewed every time you move home.

Employer-issued insurance

Employer-issue insurance is known to be available in some companies as an additional employee benefit. There are some employers that offer minimum required benefits that are free for the employee but can be adjusted at an additional cost. If you are without insurance and previously applied for coverage only to be declined, then life insurance alternatives could be worth seeing if you can obtain insurance through your current or most recent employer. For instance, if you are not employed but might need insurance, you can look for a job with insurance benefits. However, be sure to find out the requirements for receiving insurance benefits. Some of the benefits may be limited depending on your employment status, hours, years of service, geographic location, or rank.

Key features:

• Payout is typically two to four times your annual salary, although some employers offer more.
• Costs you nothing, you just need to be employed by the company to benefit.
• Only offered by some employers. It is not a requirement to provide it.
• Your cover ends if you leave the company.
• Death-in-service payouts may be lower than your family would need, so it can still be worth taking out a life insurance policy as well.
• It can be taken into account when applying for life insurance, bringing the cost down.
• Details are not required about your lifestyle or medical history – as they are when you apply for most types of insurance.
• Payouts may be free from inheritance tax if held in a trust.

Pre-paid funeral

A pre-paid funeral ensures that most or all of the costs of the funeral are paid in advance so that beneficiaries have to look for ways to make contributions towards the funeral. It is also interesting to know that, on average, a funeral costs $8,300; many people use their life insurance to pay for it; however, a pre-paid funeral plan is the same thing. It varies from $10,000 to $25,000 and there are two options: pay in advance or make monthly payments. This life insurance alternatives option could be useful to reduce the stress of the remaining family members during the mourning and may be more suitable than life insurance to pay for the funeral.

Key features:

• It is possible to purchase a plan as a single sum, or every month.
• Most of the payouts are tax-free, including the inheritance tax.
• It operates outside the Financial Conduct Authority (FCA), so if your insurer disappears, you are not exposed to risk.
• The Funeral Planning Authority (FPA), which is a professional body of the sector, expects its members to observe certain conduct based on their code of conduct.

Accidental death insurance

CDC reports that accidental injuries are the fourth most common cause of death in the United States of America. If you die or lose a limb, AD&D coverage guarantees that your spouse gets a certain amount of money every month or one lump sum to replace your salary. While AD&D insurance is usually available through the employer, it can also be bought individually.

Key features:

• Pays a tax-free lump sum to your family if you are involved in a fatal accident. Many policies cover incidents that happen abroad. 
• Some of the major causes they do not pay include death due to sickness, suicide, or engaging in risky behaviors like alcoholism.

• This means that you do not need to worry about your current health status or even your bad habits which will determine the cost of the policy you need to purchase.
• A partner that lives with you can be added to your policy
• Cheaper than general life insurance, with premiums starting from less than £2 a month.

Guaranteed Issue Plan

Various life insurance policies, including standard ones, may involve specific procedures like passing medical tests or stating all health issues. It could be very hard to get a traditional policy for someone with a condition such as a terminal illness. On the other hand, a guaranteed issue plan is issued without regard to the health of the applicant and is recommended for those who are denied standard life insurance.

However, a guaranteed issue plan can prove expensive as compared to other available options. Limits of coverage for such insurance programs often stay at $10,000 to $25,000, which is only enough to pay for immediate needs and not for long-term investment. Moreover, these plans involve a higher premium than the usual life insurance policies. Premium costs can vary significantly depending on age and the provider.

Key Features

• Provides coverage without health assessments, ensuring eligibility for most applicants.
• Coverage amounts are usually low, between $10,000 and $25,000.
• Primarily covers immediate expenses, with limited long-term financial support.
• Premiums tend to be higher than those for standard life insurance.
• Premium rates can vary significantly based on age and provider.

Asset-Based or Combination Policy

A hybrid or asset-based policy combines long-term care with life insurance or an investment vehicle, making it a more flexible insurance type. This type of Life Insurance Alternatives can offer payments for care costs, which is something that most basic life insurance policies do not provide. It is important because it allows you to receive the policy benefits to cater for appropriate medical expenses in your lifetime. It also offers financial protection because in case you die, your beneficiaries are going to receive the agreed amount of money.

Key Features

• Provides funds for long-term care and life insurance benefits.
• Allows access to benefits during your lifetime for medical costs.
• Ensures a payout to beneficiaries upon death, providing financial security.
• Typically more expensive than standard life insurance policies.
• Long-term care coverage may have a capped benefit amount, requiring out-of-pocket payment if exceeded.
• Offers financial flexibility, allowing for peace of mind regarding future healthcare needs.

Self-funding via Investing & Saving

Self-funding is a straightforward alternative to life insurance, involving setting aside your own money through investing or saving. Regular and systematic saving over many years is possible and can lead to a substantial amount by the time an individual is considering retirement. When it comes to investing, one should always consider seeking advice from a financial and legal professional regarding the best way to invest and form a strategy that would be most suitable according to the individual’s situation. If you want a more conventional method of saving, then look for a high-yield savings account that your beneficiaries would be able to make use of if you die.

The main disadvantage of this scheme is the lack of limits on the use and timing of funds. Go through some of the life situations that may compel you to withdraw some of the money from the investments or savings meant for your loved ones. If you are considering self-funding, make sure you would be able to afford it depending on other external factors apart from your financial capacity.

Key Features

• Involves saving or investing money as an alternative to life insurance.
• Allows for personal control over funds and potential growth through investments.
• Requires early and consistent effort to accumulate substantial savings.
• Offers flexibility with a high-yield savings account for beneficiary access.
• Lacks restrictions on fund usage, which may impact savings if accessed for other needs.
• Necessitates a stable financial situation to ensure consistent saving and investing.

Pension Plans

A pension refers to an arrangement that people contribute to for a significant part of their working years to generate income in their retirement. Annuities can be taken to provide for your immediate family a tax-efficient way of passing on pensions that offer income security.

Most working individuals have a defined contribution pension scheme the returns depend on the total money contributed. It is even better if you die before attaining the age of 75, the pension money can be passed to the beneficiaries tax-free. However, if you die any time after the age of 75, you may have to pay income tax to withdraw these funds.

Life Insurance Alternatives Pension savings can offer substantial financial support to your family if you don’t exhaust them during retirement. For those with defined benefit pensions, which provide a guaranteed income, passing on benefits may be limited, although a spouse might receive some provision.

Key Features

• A vehicle for saving money to fund retirement, providing financial security.
• Defined-contribution pensions depend on the total amount contributed.
• Beneficiaries inherit tax-free if you die before age 75; taxes may apply after 75.
• Provides substantial financial support if savings are not exhausted in retirement.
• Defined benefit pensions provide a set income and may have limited inheritance options.
• May offer provisions for a spouse, depending on the pension type.

Conclusion

Preparing for unexpected loss can be difficult, but life insurance—and life insurance alternatives —can help to protect your loved ones from potential financial struggles. Coventry aims to provide the details you need to make an informed decision, especially one that can greatly impact the lives of those you care about.

FAQs

1- Do you need life insurance?

There are many good reasons to carry life insurance, although it’s not a must for everyone. It’s important to take stock of your financial and life situation to determine what is in the best interests of you and your family. By doing so, you can decide whether you need life insurance or not.

2- How many US citizens can’t afford health care?

An estimated 112 million (44%) American adults are struggling to pay for healthcare, and more than double that number (93%) feel that what they do pay is not worth the cost.

References:

• https://www.harborlifesettlements.com/alternatives-to-life-insurance/
• https://www.lisettlements.com/news/four-life-insurance-alternatives-you-should-know-about/
• https://www.coventrydirect.com/blog/life-insurance-alternatives/