Life Insurance

Life insurance can provide some vital financial security for people (such as your spouse and other members of your family) who depend on you financially.

There are different types of life insurance depending on your circumstances.

What it does
Life insurance is designed to pay out a lump sum or a fixed regular income either when you die (if a whole of life policy) or if you die within a specified term (term insurance).

Some whole of life policies may also contain an investment element to them, but these investment-type policies cost a lot more than protection-only insurance.

Term insurance (or assurance)
This is the cheapest and simplest type of life insurance. It is known as term insurance because you choose how long you are covered for, say, 10, 15 or 20 years (the term). It only pays out if you die within the term that you have agreed. If you live longer than the term your dependents would receive nothing.

A couple can also take out term assurance in both partners’ names, with the policy paying out on the first death only during the term.

There are different types of policy that you can buy:

  • family income benefit - a policy which pays out income rather than a lump sum;
  • increasing - where the cover and premiums rise over the years;
  • decreasing - the cover decreases over the years; or
  • renewable policy - this lets you extend the original term of the cover.
Decreasing term insurance is often linked to a repayment mortgage (where the amount you owe to the mortgage provider decreases over time) and may, in this instance, be called mortgage term insurance.

The premiums you pay are usually fixed for the whole term. There are also contracts where premiums are reviewable after a certain period, usually five years.

Whole of life insurance
Whole of life insurance pays out an agreed sum when you die, whenever that is, as long as you are still paying the premiums for the cover.

Cost
Whole of life policies will cost more than term insurance policies, partly because they will pay out whenever you die, but also because of the various charges that come with them.

The cost of either type of cover depends mainly of the likelihood of the insurer having to pay out - so if you are a smoker and you do a job that is considered dangerous or risky, then you will pay higher premiums than a non-smoking office worker. Life insurance also costs more for men because, on average, they have a lower life expectancy than women.

Always compare what is covered by a policy, not just the price. Some policies might be cheaper than others, but be aware that they may not offer the same level of protection.

Key things to think about
Check for exclusions - in other words instances when the policy will not pay out. For example, most life policies do not cover death due to alcohol or drug abuse. You also might not be covered while doing risky hobbies. If your health is poor when the policy starts some causes of death might be excluded or you might be refused cover altogether.

How flexible is the insurance contract? Can you reduce or increase cover easily as your circumstances change? Are there extra charges for doing this? Does cover stop immediately if you miss a payment, or is there a period of grace?

By paying extra, you can often include a waiver of premium. This will pay the premiums if you cannot work due to a long-term illness so that your cover is not interrupted.

If you want to change insurer, check the level of premiums for the new contract before switching - premiums may have gone up due to older age or because you have developed medical conditions. Also check the new level of cover compared to the previous one. Different benefits may be available, and different exclusions may be applied, for example you may not be covered for medical conditions that have developed before the switch, even if these were covered under the previous contract.

A life policy can be set up under trust. This means that in the event of your death the proceeds of the policy are paid directly to dependant(s) of your choice. Provided that a trust is set up properly there may be benefits to doing this. However, using a trust may not be suitable for everyone and because of the complexities involved you should always seek financial and legal advice if considering doing this.

Make sure that you do not lose out by switching. Your current policy may include cover options which are not offered under the new policy you are considering.

Never cancel your current policy until you are sure (and have received confirmation) that you have another policy in place - you face a very real danger that you could leave yourself uninsured.

If your health has deteriorated since taking out your existing policy, this may mean that the premiums for a new policy are more expensive and you might be better off keeping your current policy.
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