When it comes to insurance, many of us recognise that it makes a lot of sense. Whether you’re looking to protect your investment in expensive gadgets, looking after the contents of your home, or fulfilling one of the legal requirements of car ownership, taking out insurance is simply seen as a fact of life.
And, indeed, life insurance is a sound investment for many people in the UK. Whilst it may not be appropriate for everyone, taking out a life insurance policy is an excellent way to give both yourself and your loved ones some precious peace of mind, just in case the worst should ever happen. The pay out from a life insurance policy can be used to cover the cost of a mortgage on the family home, keep up with the cost of living such as bills, and fund your children’s school or university education.
Yet it isn’t always clear at what age is best to start paying for such insurance. After all, if you start paying from a relatively early age, you might risk spending more on premiums than your policy would ultimately pay out. Yet, if you leave it until later in life, you are also likely to find that your monthly premiums are significantly more expensive.
When it comes to life insurance, there are a number of different products available. Each type of life insurance comes with its own pros and cons, so do your research and be clear on what your chosen policy involves before you sign up to it.
Term life insurance refers to plans that last for a pre-determined period of time, often consisting of 5, 10, or 25 years. This kind of life insurance will only pay out if you are to pass away during the selected period, and within this category there are three kinds of policy: Level, Decreasing, and Increasing. Level policies will keep the amount to be paid out at a fixed amount throughout the duration of the cover, and will be paid as a single lump sum in the event that you die during the insurance period. This kind of policy tends to be the easiest and most affordable option.
Decreasing policies see the cover amount gradually reduce over the course of the insurance period. This is ideal for insurance that is taken out with a view to covering similarly decreasing liabilities, such as a mortgage, which will have less to pay off at the end of the life insurance term than when it is first taken out. Increasing policies, meanwhile, increase the cover amount to keep pace with inflation.
The other main type of life insurance is Whole Of Life insurance. This kind of policy will, as the name suggests, provide cover for your death regardless as to when it happens, provided that you have kept up to date with paying your premiums. People who opt for this kind of life insurance cover tend to do so because they want to prepare their dependants for the expenses associated with Inheritance Tax, or they want to use the eventual payment to cover the cost of their own funeral.
The downside of this kind of insurance policy is that they tend to be more expensive than Term insurance policies covering shorter, specified periods. There is also the chance that you could live long enough that you end up paying more in premiums than the agreed cover amount. Life Insurance plans marketed at the over-50s can fall into this category and do not always represent good value for money.
There is also the option to take out joint life insurance, usually with a spouse or civil partner, although this kind of cover can also be used by those in a financially dependant relationship, such as those who co-own a business. It’s important to note that a joint life insurance policy will pay out only once, on the first death of either policyholder and should this happen when the surviving partner is older, they may find that taking out a new life insurance policy is much more expensive. The advantage of choosing a joint life insurance policy is that it tends to work out cheaper than purchasing two single policies.
Whilst it is certainly wise to invest in life insurance whilst you are fairly young, this is often the stage of life at which we have less money to spare. With typical costs of a mortgage or rent, raising a family, and debts from university or car purchases, a life insurance policy may not appear to be a priority and worries about your death may seem to be a long away. Yet, as with starting a pension plan, signing up to a life insurance policy is best carried out as soon as reasonably possible.
Understanding the different types of life insurance can offer a useful insight into just when would be best for you to start a life insurance policy. For example, if you decide that a term life insurance policy is right for you, then you will likely want to consider when you might expect your dependants to need the money. Timing the term to end just after key financial points, such as when your children will have left home or education, or when your mortgage is due to be paid off, may be a sensible plan.
To understand just why it costs less to take out a life insurance policy whilst you’re still young, we need to look at how the insurance industry works. All types of insurance (be it car, home contents, or health) are sold by financial institutions who want to calculate the best way to make money from your policy. After all, insurance companies are businesses, and they need to be sure of making a healthy profit in order to stay in the game.
If an insurance company were to miscalculate and offer cheaper premiums to a group of people who, statistically, were significantly more likely to make a claim, then they would risk paying out more money than they will have received from these customers’ premiums. This, of course, is bad news for the insurance company. Risk, therefore, is the key word for any kind of insurance policy, and insurance companies spend a lot of time and money devising how to predict the financial benefit of every premium that they sell.
In the case of life insurance, insurers predict that the older a customer is, the more likely his or her named beneficiaries will be to make a claim, and they may also make a claim before many premiums have been paid. Other factors that affect the cost include the unfortunate reality that the older we are, the more likely we are to develop significant health conditions that can affect our longevity. Even lifestyle choices can play a part in driving up the cost of premiums as you get older: for example, older drivers are considered to be a greater insurance risk, due to slowing reaction times, poorer eyesight and hearing, and a greater chance of being badly injured due to their frailty, with statistics showing they are more likely to be seriously hurt or killed if they were to be involved in a car accident .
When it comes to calculating the cost of a customer’s life insurance age is not the only consideration. Insurers will also look at many other factors when it comes to calculating the cost of an individual’s life insurance premiums. There are, for example, lifestyle factors and even jobs that can significantly drive up the price of a policy, as they are perceived as presenting a greater risk of early death. These factors can include popular habits such as smoking, drinking alcohol, or taking recreational drugs, and hobbies and interests such as scuba diving, rock climbing, or mountain biking.
Jobs that are flagged as high risk by insurance companies include roles in farming, construction, security, and the emergency services. For those working in the armed forces, there are specialist insurance providers who can accommodate the level of risk associated with the travel and nature of work undertaken by those in the army, navy, or air force.
Your health and medical history may also play a part in driving up the cost of your life insurance policy, regardless of your current age. For example, people who have a high BMI (Body Mass Index), or who have a genetic predisposition to certain diseases may be charged higher premiums, as may those who have already recovered from a serious illness such as cancer. Insurers may ask you to attend a medical appointment before agreeing to offer you a policy.
The amount of cover that you want will also affect the cost of your premiums: simply put, the greater the eventual pay out sum, the higher your monthly premiums are likely to be. Consider carefully what amount will best cover your mortgage and family expenses, to avoid opting for too much cover and paying more than you need.
Whilst you may think that it might be hard for your insurance company to ever discover that you enjoy a spot of sky diving in your free time, nonetheless, the golden rule is to always be scrupulously honest when answering any questions on an insurance application. Failure to do so can lead to your claim being rejected when the time comes, which could potentially leave your family facing financial difficulties. Insurance companies take a very strong line against all types of insurance fraud, and being caught out can also result in your being rejected for other important types of insurance, or even facing criminal charges.
If you do not own your own home, do not have any dependants, or have a spouse who is able to cover all of your family expenses themselves should you pass away, then you may not need life insurance at all. Similarly, if you have a lower income and receive benefits, then you probably don’t need to take out life insurance cover.
It’s also worth investigating any benefits that your job may be providing, such as Death In Service insurance, which will pay a sum to your dependants should you die whilst working for your current employer.
Not everybody’s circumstances will mean that life insurance is the best option for them. It’s important to remember that life insurance only pays out if the policy holder dies, so if other eventualities are a greater concern, then other types of insurance may be a better fit. Loss Of Income insurance, for example, can provide a safety net worth around 50 to 65% of your salary, should you lose the ability to work due to injury or illness. This kind of insurance means that mortgage or rent can be paid, together with bills and other essential expenses, until you are fit to return to work or until you are of retirement age.
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