Life insurance can ensure that your loved ones are financially protected in the event of your death.
Why do some People get Life Insurance?
People tend to consider life insurance if they have loved ones who rely on their income and would financially struggle without it, such as children.
There are two main types of life insurance policies: term life insurance policies and whole of life insurance policies.
Term Life Insurance Policies
Term life insurance policies run over a fixed period of time. Payment is only made to your dependents if you die during this specified term of your policy.
There are different types of life insurance policy:
- Level – where your dependents are paid a lump sum if you die during the term. The level of cover afforded is the same throughout the policy
- Decreasing – where the level of cover decreases each year. This type of policy is designed to be used with repayment mortgages, where the loan amount still owed for the property reduces over time. Some choose this type of life insurance when they get a mortgage so that it doesn’t fall to their loved ones to continue repayments on their property
- Increasing – where the cover level increases over the term of the policy in order to account for inflation
Whole of Life Insurance Policies
Whole of life insurance policies mean that your dependents are financially compensated no matter when you die. This type of life insurance is often used to help loved ones with things like funeral costs or inheritance tax planning.
Whole of life insurance policies tend to be more costly than shorter term policies. If you do end up living for longer than you expected, you may end up paying more for your life insurance than your dependents actually get paid out when you die.
Joint and Single Life Insurances
Joint life insurance means that the insurance pay-out goes to the surviving policyholder, unless other arrangements have been made.
Single life insurance means that the money paid out by the insurance provider goes straight into your estate, so you must decide who you wish this to go to when you die.
Joint insurance policies are usually the cheaper option, but they only pay out on the first death, not the deaths of both policy holders.
Life Insurance may not be Right for You
You may have access to a death-in-service benefit through your employment, which pays your dependents a lump sum if you die whilst still employed at that business.
You might have a partner or dependents who have other means of income and so are not financially reliant on you, in which case life insurance could be an unnecessary cost.
You may be single with no dependents and so don’t wish to have life insurance.
You may be on a low income and could qualify for state benefits, of which you might no longer be able to claim if opting for life insurance.
Factors Affecting Price
- The type of policy you have
- Your age
- Health – e.g, any pre-existing health conditions
- Family health history
- Habits and lifestyle – the insurance provider may want to know how much alcohol you drink, whether you smoke etc
- Occupation
- Hobbies – your insurance provider may increase your premium if you enjoy dangerous hobbies or extreme sports, such as rock climbing or skiing
Things to Bear in Mind…
You can usually choose between reviewable or guaranteed premiums. Reviewable premiums are often cheaper to begin with but your insurer can hike up the price as you get older. On the other hand, with guaranteed premiums you pay the same monthly cost for the whole policy.
Most life insurance policies include exclusions, such as the insurance provider not paying out if you die from drug or alcohol abuse. You should always make sure that you are fully aware of every aspect of any insurance policy you have, whether that be life insurance, car insurance, home insurance, or any other type.
You should always be completely honest on your life insurance application. Don’t leave out any health conditions as this could lead to your policy being classed as void, where your insurer refuses to pay out in the event of your death.
Payments to your loved ones are paid as regular instalments or as a lump sum. The amount that will be paid when you die depends on the level of cover you have on your life insurance policy.