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Everything You Need to Know About Life Insurance

Thinking about our death is something that most of us don’t do very much.  It’s healthy to focus on living and to not dwell too much on the inescapable fact that our lives will one day come to an end. 

Taking out life insurance requires us to consider the implications of our death and perhaps not surprisingly, many of us choose not to do that. In fact, it is estimated that 36 million UK adults are without the financial safety net that life insurance provides.

Who needs life insurance?

If you are single and intend to remain so and have no dependents, then you may reasonably decide that life insurance is a waste of your money, but for most of us our lives are financially entangled with others. 

If you are buying property with a partner, you need to ensure that your debt is covered in the event of your death. If you are a parent, then the case for taking out life insurance is even more pressing.

Current estimates conclude that it will cost in excess of £230,000 to raise a child to the age of twenty-one. 

Were you to die prematurely then your family’s future could well be financially impoverished. If your children are grown and independent you may wish to consider your partner’s financial well-being, were you to die.

 

How much life insurance do you need?

How much cover you require will depend on what stage of your life you are at. 

If you are over fifty you may wish simply to cover your funeral costs and leave a small nest egg for your nearest and dearest.  If you are starting a family, then clearly the sum needs to be considerably larger.

As a general guide you should be thinking in terms of ten times your annual salary.  If you are a stay at home parent don’t make the mistake of thinking that your labour has no value. What would be the financial cost of all the childcare and domestic work if you were no longer there?

When should I take out life insurance?

The younger you are, the cheaper your insurance premiums will be, so it makes sense to take out life insurance as soon as you begin earning.

 

What types of insurance cover are available?

Whole Life Insurance

Sometimes referred to as an assurance policy, this policy pays out a fixed lump sum when you die.  It is important that the monthly or annual premium is always paid because any lapse in payment will invalidate the policy.  It is an expensive form of policy because the insurer will always have to pay out a fixed sum. Were you to live to a ripe old age you may well have paid more than the value of the lump sum during the course of your life.

Standard Life Insurance

Also known as ‘level term insurance’.  This insurance covers you for a set period but once that period has ended there is no money back.  This insurance can be used to provide peace of mind during the years when you are raising a family and paying a mortgage.

Decreasing Term Insurance

Premiums and the pay out sum gradually decrease over an agreed period.  This type of policy is typically taken out to cover a loan where the payments are also decreasing.

Maximum Cover

This type of policy is initially cheap, but your provider will review the policy after an agreed period and may increase the premium if you are considered to be at risk.

Joint Insurance

This policy is taken out by couples and pays out a lump sum on the first death, at which point the policy terminates, leaving the survivor without insurance.  This is a cheaper form of life insurance but there are potential drawbacks. If the relationship breaks down an insurance provider may not be able to convert a joint policy into two single policies.  In addition, the survivor will find that taking out a new insurance policy is more expensive.

 

Over 50s Life Insurance

Over 50s life insurance enables people whose previous life insurance may have expired to provide a lump sum on their death, either to pay for funeral expenses or leave to their nearest and dearest. 

You need to feel confident that you will be able to sustain the payments of the monthly premium and as with whole life insurance, there may come a point at which your payments exceed the value of the lump sum.

Critical Illness Cover

This is an important form of cover which you should consider adding to your life insurance. 

One third of us will develop some form of cancer during our lifetime and premature death is less likely than protracted illness.  Critical illness cover will pay out a tax-free lump sum if you are to fall ill with an illness covered by the policy. If there is a history of critical illness in your family, if you have dependents or if your job does not include a benefits package, you should consider this policy. 

You can use the money to pay off a mortgage, cover the cost of not working or pay for private health care. You don’t need to have a medical check to apply for this insurance but if you do fail to mention something in your medical history, you will invalidate your insurance.

 

What Determines the Cost of Insurance?

Insurance premiums are calculated by taking into account your age, job, lifestyle, medical history, the size of the pay out and the duration of the insurance. 

Unfortunately, if you have a history of physical or mental illness this will make your insurance more difficult to obtain and more expensive.