What is life insurance?
Life insurance is designed to help support your family financially in the event of your death. It does this by paying out a lump sum of money to your family if you die.
The money paid out from life insurance can be used for anything. Most commonly life insurance is used to pay off a mortgage, pay for a funeral or help maintain your loved one’s living costs.
Life insurance can give you the peace of mind knowing that whatever happens, your family’s finances are secured.
Life insurance can also be known as life assurance or life cover. The contract between you and the insurer is referred to as the policy.
How does it work?
You choose how much money you would like to leave your family if you die. You also choose the number of years for which the cover will last. You could choose a policy that will pay out no matter when you die.
The amount of money to be paid out is referred to as the ‘sum assured’ and the length of time referred to as the ‘term’ of the policy.
Life insurance will only pay out if you die within the term of the policy. Once the term expires, your cover will stop. To reduce their risk, insurers set limits on how long you can have life insurance for. They also balance the risk of longer terms by charging more in premiums.
What does life insurance cover?
Life insurance will usually pay out no matter what the cause of death. Life insurance will also pay out if you’re terminally ill and given the prognosis of 12 months or less to live by a doctor. This is known as terminal illness cover.
The only circumstances where life insurance won’t pay out are:
- If the policy excludes certain causes of death such as suicide (although most policies will pay out for suicide after an initial period)
- If you’re not truthful when answering medical or lifestyle questions when you take out the policy (such as lying about your smoker status or previous illnesses)
- You stop paying your life insurance premiums or die after the policy has finished.
How much does it cost?
The price you pay for your life insurance will be largely based on how much cover you want, for how long and will also take into account your age, health and whether or not you smoke.
The older you are, the more expensive your premiums will be. Premiums will also be more expensive for smokers than non-smokers (by around double).
When you buy life insurance, you’ll be asked a series of medical or lifestyle questions to establish your quotes.
Some types of life insurance are cheaper than others. For example, a level term policy will be more expensive than a decreasing term policy.
With all life insurance, as long as you pay your premiums each month you’ll be covered. If however you stop paying your premiums or cancel your policy, your cover will stop and you won’t receive any of the money you paid in back. It’s therefore very important that your premiums will be affordable not just now, but for the entire term of your policy.
With most life insurance policies, your premiums are guaranteed to remain the same throughout the term of the policy.
Do I need life insurance?
If your family relies on you financially, life insurance could give you and them peace of mind knowing that should you pass away, they’ll be able to cope without you.
Whilst anyone can take out life insurance, it’s arguably more important if:
- You have a mortgage
- You have a partner or children that rely on you financially
- You help pay for the care of a relative or take care of them yourself
How much life insurance do I need?
The amount of cover you need depends on your individual circumstances. Ensuring you have enough cover to protect your family from the largest financial commitments can be a good place to start.
When calculating how much life insurance you need it’s worth considering:
- The amount left to repay on your mortgage or the cost of rent
- The costs of raising your children
- Other loans and debts
- The cost of a funeral
As well as considering the amount of cover you need, it’s also important that your cover is affordable. Remember, you’ll need to pay the monthly premium for the full term of the policy. Reducing the amount of cover you take out can lower the price you pay significantly.
What types of life insurance are there?
There are 3 main types of life insurance.
Level term life insurance is the most common type of policy. It’s called level term because the amount of money that would pay out if you died remains constant or ‘level’.
Whether you die at the start or near the end of the policy term, the amount of money that pays out will be the same.
With decreasing term cover, the amount of money that would pay out if you died reduces over the term of the policy as you pay off your repayment mortgage. For this reason, decreasing term cover is often referred to as ‘mortgage life insurance’.
Whilst decreasing term cover is designed specifically to protect repayment mortgages, a level term policy could still protect your mortgage whilst providing additional cover for your family. The only advantage of decreasing term cover is that it’s generally cheaper than level term.
Whole of life
Whole of life insurance, as the name suggests covers you for the whole of your life. It’s guaranteed to pay out no matter when you die.
Because whole of life insurance will definitely pay out, it’s often much more expensive than decreasing or level term cover.
Some whole of life policies are referred to as ‘over 50’s plans’. These policies are designed specifically for those aged 50 or over. With over 50’s plans, you won’t usually need to complete any medical questions and acceptance onto the policy can be guaranteed.
Which life insurance company is the best?
Life insurance policies can initially look very similar, which makes choosing difficult. When you compare life insurance policies, it’s important to consider:
Suitability of the cover for your needs
The most important factor when choosing a life insurance policy is whether or not it suits your needs. A good life insurance company or broker will establish your reasons for wanting cover and will help you find a suitable yet affordable policy.
Each insurer differs in how they calculate the risk of insuring your life. This means costs between insurers can vary considerably. Comparing quotes from multiple insurers can help you find the most affordable cover.
It’s important to note that any price you see online will be the standard price before your individual medical history and lifestyle is taken into account.
Insurers often include extras along with their cover. This can include services that offer support or counselling for the bereaved, life cover whilst your application is processed or pay-outs for additional circumstances that other insurers may not cover, such as suicide.
Claims from all truthful life insurance applications are paid out in line with the policy conditions. Although the vast majority of insurers pay out between 95%-100% of claims, it can be of comfort to know that the insurer you choose declines fewer claims.