There is often a debate over whether life insurance is really necessary. While some believe that purchasing a policy provides protection for your loved ones, others argue that the cost of having a policy is too high given its likelihood of payout.
In this article, we’ll look at how a life insurance policy works and why you may need cover for your loved ones…
How does a life insurance policy work?
A life insurance policy protects your loved ones against financial hardship after your death. It can help your family cover future costs, such as funeral expenses, mortgage repayments and other bills. When you die, your insurer issues a cash lump sum to your loved ones, which can help them through this difficult time.
Just like any other type of insurance policy, you pay a monthly premium to your insurer for cover. It’s important that you remain on top of these payments, otherwise your cover can be ended early. In this instance, you won;t receive any money back for the premiums paid so far.
There are two main types of life insurance policies:
- Whole life insurance – This type of policy provides permanent protection, paying out regardless of when you die. Your insurer then pays out a cash lump sum to your loved ones, acting as a replacement of your income. Throughout the policy, both the value and premium rate remain fixed.
- Term life insurance – Unlike whole, term life insurance covers you for a set period of time (typically between 5-25 years). This type of cover pays out if you die within the agreed policy term. Should you survive, the policy expires, and you won’t be entitled to a pay-out from there on.
Term life insurance has 3 levels of cover:
- Level term cover is the most standard type of term policies. Both the pay out value and premium costs remain fixed throughout the policy term.
- Decreasing term cover (also known as mortgage life insurance) is intended to cover large payments your family would struggle to pay alone. This can include a mortgage and other significant loans and debts. The payout value decreases as you make payments towards the outstanding balance.
- Increasing term cover is designed to protect the future payout value from inflation. It does this by increasing the pay out value over time, however so will your premiums.
Another option you have is to get a joint life insurance policy. This is a popular choice for cover with couples, as it protects two people under a single policy. It typically pays out if you or your spouse dies, the survivor then has enough money to cover future finances.
Why do I need a life insurance policy?
If you have a family, your life is important to you. You want to protect the people who are most dear to you in case something happens to you. Life insurance can help pay for their expenses if they need it. It’s also a good way to leave money behind when you die.
Here are just some reasons why you might want to buy a life insurance policy:
- Protects your family against costs, such as funeral expenses
- Can be used to cover your home’s mortgage
- Helps to pay off credit card debt and other outstanding payments
- Allows you to leave a legacy for your children
- Provides income for your partner/spouse should you pass away
With life insurance, it’s important to note that a pay-out is not always guaranteed. This ultimately depends on the type of cover you decide to buy.
Although term life policies offer cheaper premiums, the policy can expire without paying out. This is ideal if you’re looking to be covered for a certain amount of time. However, if you want long-term cover with a guaranteed pay out, then whole life insurance is the logical option.
How much cover do I need?
The amount of cover you need depends on how much risk you’re willing to take. If you’re young, healthy, and don’t have any dependents, you may only require a small amount of cover. However, if you have children or financial responsibilities like a mortgage, you’ll probably need a higher amount of cover.
You can find out how much cover you need by using an online calculator. These calculators use information about your age, gender, health status, occupation and lifestyle to estimate what level of cover you need.
One way of working out how much cover you need is by assessing your family’s current financial situation. If you are the main source of your family’s income, they’ll likely require a higher amount of cover. However, your family may have savings, which can lead to them requiring less support.
How much does a life insurance policy cost?
The price of a life insurance policy depends on many factors, including:
Age – The cost of life insurance rises as you get older, due to the increased likelihood of a claim being made. If you’re looking for a cheaper premium rate, it’s best to take out cover at an early stage.
Health – Your insurance provider will ask you if you have a medical condition which poses a threat to your health. They may also ask about your family’s medical history if there’s evidence of hereditary diseases.
Lifestyle – If you’re a smoker, you can expect to pay a higher premium from life insurance compared to non smokers. This is due to the damage that smoking can have on your health. Some insurers may reduce your premiums if you remain smoke-free, typically for at least 12 months.
Occupation – Certain occupations carry more risks than others. For example, firefighters and police officers face greater risks of dying in the line of duty. As a result, their premiums tend to be higher than other occupations.
Where can I buy a life insurance policy?
There are two main ways to purchase a life insurance policy:
Online – You can apply for a life insurance policy online through an insurance provider’s website. Most websites allow you to compare different types of cover and choose the one that suits you best.
In person – You can visit your local branch of an insurance company and discuss your needs with a member of staff. This allows you to talk to someone who understands your circumstances and can help you decide which type of cover would suit you best.
Through a broker – You may want to apply through a specialist life insurance broker. They can help you find the cheapest rates for cover, as well as providing advice on the type of policy you may need.
Whichever option you decide to take, know that your family will have peace of mind for the future ahead.
