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Life Insurance

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What is life insurance?

Lots of people don’t like thinking about what might happen when they die. But the sad fact is, it will happen to everyone!

A life insurance policy is a type of cover which will pay out a lump sum to your dependents in the event of your death. Having right insurance in place can provide peace of mind. The payments can ease financial hardship for relatives and children left behind.

The insurance policies are determined by a number of factors. These include your age, your health, whether you smoke, where you live, the length or ‘term’ of the contract and the amount of cover you need.

Why you need life insurance?

Life insurance policies are part of good financial planning. Bereavement is a stressful time for families. This stress can be emotional, but there can also be financial implications. If your income is needed to meet the mortgage payment, or other ongoing costs when you die your dependents may struggle to meet these obligations.

Having an appropriate policy in place can mean that essential costs are covered when you die. The cover means that loved ones will not be at financial risk if something happens to you.

Types of life insurance

There are two main types of life insurance, ‘level term’ and decreasing term.

Level term life insurance This means that the benefit paid out in the event of death stays the same for the whole length of the term of the policy.

Decreasing term Over the term of the policy, the amount payable decreases in increments, usually each year. This kind of cover is often referred to as mortgage protection.

In each case, you will be able to choose the length of the term, and the amount of cover required. For example, if you have dependent children, you may choose to cover only the period until they are grown up and likely to have left home.

Other types of life insurance include:

Family protection insurance This is similar to decreasing term protection, but the payments are made as a regular income for any dependents, rather than one lump sum. In effect, this can provide the equivalent of a salary. It can mean your dependents do not have to change their standard of living. The payments enable a consistent income for the remainder of the term.

Whole of life insurance These types of policy can be more expensive than term cover. However, the policy will cover you for your whole life. This means dependents will get a payout regardless of when you die.

Joint life insurance These policies cover two people instead of one individual. Both people are covered. The policy will pay out when one person dies. This type of cover can often be more affordable than single user premiums. Couples need to decide whether the policy would pay out on the first, or second death because this affects the length of the term.

What to consider when taking out life insurance?

Each individual will have different needs and circumstances surrounding financial planning for the end of life. Life insurance policies take into account a number of factors. Many things will affect the cost and duration of the policy.

  • Health: If anyone covered by a policy has health problems, the cost of the premium is likely to be higher than for a healthy individual.
  • Your age: As you get older, the cost of life insurance policies is likely to increase. This is because you are deemed to be closer to the end of life.
  • The length of the term: Choosing a whole life term will guarantee a payout when you die. However, the eventual cost of the premiums may exceed the sum if you live for a long time.
  • Type of payment: Consider carefully whether your dependents will be better suited to one single lump sum payment. Or, would a continuous fixed income provide greater financial stability.

Life insurance FAQs

Q – I am over 50. Can I still get a life insurance policy?

A – There are many plans for life insurance available if you are over 50. These tend to offer smaller payouts but usually have fixed premium costs. The sum paid can help to cover funeral costs.

Q – I have pre-existing health problems. Can I still get life insurance?

A – A pre-existing medical problem means any health issue present before a policy begins. This critical illness can include conditions like asthma, diabetes, or cancer. Life cover is still available if you have pre-existing medical conditions. The cover is likely to be more expensive. It is important to note that your policy could also become invalid if you fail to disclose pre-existing conditions to your insurer.

Q – How can I reduce the cost of my life insurance policy?

A – Being able to demonstrate that you are taking steps to maintain a healthy lifestyle can reduce life insurance premiums. For example, smoking is classed as a high risk, and smokers will see higher premium costs. By quitting, you could cut the cost of your policy.

Q – When should I begin a life insurance policy?

A – Regardless of your age, it’s always a good idea to plan ahead. Unfortunately, death is a fact of life, and no-one really knows when it will happen to them. The later in life a policy begins, the more expensive the premiums are likely to be. Many people take out life cover after significant events like the birth of children, marriage, or taking on a mortgage.

Q – How much cover do I need?

A – This will vary depending on your personal circumstances. Consider what the money must cover after your death. For a family with a large mortgage and lots of dependents, the sum insured will likely be higher than a single person with no dependents. As a rule of thumb, you should allow ten times your annual salary. It is up to the policyholder to make sure that the amount will provide security for their dependents, so always make detailed calculations.