The ins and outs of life insurance
Life insurance is one of those things few of us like to think about – and that’s not only because it involves thinking about the inevitable. It’s also because some find it complicated. But if you want to help provide financial security for your dependants when you pass away, it’s worth looking into.
Introducing life insurance
Life cover can be used to help pay off the mortgage and support the family in case the key earner – the one who’s been paying the bills – should die.
Depending on the type of policy you have, it can pay out a lump sum or provide a regular income. The key is to identify what you want life insurance cover for because that will help determine the best life insurance policy for you – term insurance or whole of life, for example. Remember that the first life insurance quote you get may not be the best for your circumstances.
So what types of life insurance are there?
Term life insurance
This type of life insurance cover comes in a variety of forms but essentially you’re insured for a specific period, such as 15 or 20 years. The policy pays out a lump sum if you die within the term so you’ll get nothing if you live for longer.
The different types of term life insurance and their features include the following but companies may not sell them all:
- Level term. The premium and level of life insurance cover stays the same throughout the term.
- Decreasing term. The level of life cover reduces over time. This type of life insurance policy is often taken out to cover mortgages or other loans where the amount owed decreases year on year. The aim is that if you die the outstanding loan can be paid off.
- Family income benefit. This type of term life insurance pays a regular income rather than a lump sum.
- Increasing term. The cover and premium rise over the years.
You may also see decreasing term insurance called mortgage term insurance or mortgage protection life cover or insurance.
Policies can be taken out for a single life or couples can take one out together. If you do take out a joint policy, it will usually only pay on the first death during the term.
Whole life insurance
This type of life insurance cover (also known as whole of life cover) generally pays out a lump sum when you die – whenever that may be – as long as you’re still paying the premiums.
This is different to term life insurance, which will only pay out if you die within a fixed term. As a payout is assured, whole of life policies are usually more expensive than term life cover.
Investment-type life insurance
The amount paid out under investment-type life insurance policies will depend on how well the investments in the insurance fund have performed over time and are therefore inherently more risky than straightforward life insurance policies.
It’s important to get financial advice before taking out this type of policy.
Costs
Cheap life insurance may not set you back as much but it may not provide the cover you need from your policy. So it’s vital that you check the details of the cover you’re considering to ensure it’s suitable for your needs.
Remember that your premiums may be greater if, for example, you smoke, have a poor medical history, do a risky job or regularly take part in dangerous sports and hobbies such as mountaineering.
Check whether your life insurance quote offers premiums that are fixed for the term or regularly reviewed.
Some things to check
Don't ignore the small print. This will spell out what's covered and what's not covered. It's normally included in a Key Facts or Key Features document, and you should compare various policies' features to determine which one is best for you.
- Think about the exclusions. Your policy may not pay out if you take part in dangerous sports, die from drug or alcohol abuse or have an existing medical condition.
- Confirm the age limits on your life insurance quote. Some policies will stop providing cover once you reach a certain age.
- Terminal illness. Some term insurance policies may pay a lump sum if you’re diagnosed with a terminal illness during the policy.
- Consider the tax implications. You could end up paying inheritance tax on any sum paid out unless you put your plan in trust. This can be a complicated area and tax policy can change from one year to the next so it’s important to get financial advice if you’re considering this.
- Flexibility. Does your life insurance policy allow you to skip a payment or two without penalty? And what happens if you want to cancel altogether?
- Cash-in value. Check whether your policy has one or not. Not all do and you may decide that you don’t want one.
- Extra benefits. Some policies may offer additional benefits such as critical illness cover.
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