Life insurance typically pay-out once the policy holder has passed away. The lump sum received can then be used by the family/beneficiaries of the policy to avoid financial hardship i.e. by using the funds to pay off the mortgage, loans, child care costs or even funeral costs.
If you are a single person with no dependants, then you probably don’t need life insurance but if you have a partner or other dependants who rely on you financially then life insurance can provide the peace of mind you seek.
In some instance, the employer provides a death-in-service benefit which is typically x4 your basic salary. So if you pass away whilst still being employed then a pay-out will occur but in many cases x4 your basic salary is not sufficient for outstanding costs such as a mortgage and hence it is advisable to consider a life insurance policy too.
Level Term Insurance – The sum assured is the same throughout the policy.
Decreasing Term Insurance – The sum assured reduces over the period of the cover – typically taken out by people with a repayment mortgage. As can be expected, this cover is cheaper than level term insurance.
As a side note, your mortgage provider will most likely try and sell you life cover too, but its best to compare quotes to get the savviest deal around.
Increasing Term Insurance – The sum assured increases over the period of the cover to account for increases in inflation/cost of living. The increment is either fixed, typically 5%, or it tracks inflation according to the Retail Price Index (RPI). This type of cover is the most expensive compared to Level and Decreasing Term insurance.
The length of the policy is ultimately up to you, in some cases people take out cover which lasts as long as their mortgage or may be even linked to their children’s age I.e. cover taken out for 18 years to cover for any in eventualities which might happen which the children are young.
You can even take out a ‘whole of life’ assurance policy, which guarantees to pay upon you passing away, but these are typically much more expensive.
The premium for level, decreasing term and family income benefit is usually guaranteed/fixed throughout the policy term. But you should check the small print as some insurers can review the policy after 5 to 10 years at which point it will most likely go up.
The level of cover you take out is the sum insured. It is advised that the sum assured is at least x10 your basic salary but it really depends on your personal circumstance I.e. you may have a big family and hence it would be wiser for the sum insured to be x20 or x25 the basic salary.
The quote/premium which you will be offered will depend on various factors such as the length of cover, the amount of cover, optional add-ons required, age, weight, pre-existing medical conditions and lifestyle choices.
However, some of these factors can be controlled, such that if you are smoker than you can try and stop smoking or if you are overweight then you can reduce your weight and generally become healthier. Taking these steps will increase your life expectancy and therefore reduce the amount premiums you will need to pay – ultimately a win-win situation.
It is possible to get life insurance even with a pre-existing condition but it does depend on the severity of it. So in some cases, you may be refused and in others the current condition may be excluded from the policy such that, if you have diabetes then the policy will not pay out if you pass away due to the diabetes/pre-existing condition.
Generally, the older you get the higher the premium is likely to be but the ability to take out life insurance is still possible. In some cases, insurance companies take people over the age of 50 without a medical test or health questionnaire.
Joint policy is taken out by couples, who can benefit by having cheaper premiums and only one set of documents. However, the joint policy only pays out on the first claim, meaning the surviving member will have to take out new cover which will most likely be much more expensive given the increase in age and state of health.
If you select the family income benefit then the benefactors will receive a regular income which means they don’t need to think about investing/managing the money over a long period of time. However, the family income benefit only pays out until the term of the policy comes to an end and hence the premiums are much lower too.
Typically the pay-out from a life insurance policy is exempt from inheritance and capital gains tax but this is only the case if the policy is in-trust. By having the policy in-trust, you will not only save money from tax but also the funds will be available much more quickly.
You should always aim to keep your insurance provider aware of any changes in circumstance, else your policy can be declared void. Moreover, you should review your personal circumstance to ensure the level of cover is still appropriate, for example if you have a baby or increase the size of the mortgage for another house.
Whilst the exclusions vary from one policy to another, typically a pay-out is not made if the death is due to suicide, drug abuse, alcohol, a dangerous sport or even dangerous hobby.
In some cases, critical illness cover is only available with life insurance cover leading to critical illness cover being cheaper when bought combined than if purchased singularly. But with critical illness cover there is only one pay-out, so if the claimant is diagnosed with a critical condition then no further pay-out will be made once he/she passes away.
With regards to the type of illness covered, the list can be very long especially as some insurer’s cover more than 60 different injuries. However, it is important to note, that in many cases the illness needs to be critical or permanent before the pay-out will be triggered. For the case of cancer, treatable cancers will not be on the list or it will need to be at a certain stage before the pay-out will be considered.
Aside from being healthier by losing weight if you are overweight, not smoking and generally improving your life style, you can reduce the level of premium you will pay by getting life insurance whilst you are young. The older you get the higher the premiums are likely to be.
What’s more, there are many life insurance companies in the market so it really pays to compare compare compare!