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The beginner’s guide to life insurance
If you have young children and other responsibilities, you may have wondered if life insurance is for you. Here’s Chris Torney from Confused.com with a beginner’s guide to life insurance options.
Finding the right life policy for you shouldn’t be a snap decision. Whether you actually need cover, as well as what type of policy you should look for, really depends on your personal circumstances.
Let’s look at the different types of life insurance, who they’re suitable for, and what factors have a bearing on the size of the monthly payments – or premiums – you’re likely to pay.
How does life insurance work?
A life insurance policy is designed to pay out a lump sum or regular income stream to named beneficiaries in the event of your death. Beneficiaries are typically your immediate family, such as your children or partner.
Life insurance is usually taken out to ensure there’s enough money to cover a family’s ongoing living costs if a parent dies. Policies can also be used later in life to help cover the likes of funeral expenses and even inheritance tax bills.
Your life insurance premiums are usually paid monthly. What you pay each month is based on the level of cover bought; in other words, how much money’s paid out as a lump sum at the end of the policy.
Other factors are also taken into account, such as your age and overall health.
What are the different types of life insurance?
The type of life cover that’s right for you depends on what you need it for.
Term insurance is life insurance that covers you for a pre-agreed length of time. This type of cover is largely aimed at people who want their lives to be insured while they have a mortgage outstanding on their properties, as well as at parents who want financial protection while their children are growing up – although clearly, there’s considerable overlap in these two scenarios.
If you outlive the policy term, there’s no payout. The idea with term insurance is that, once the mortgage has been paid off and/or children have gained financial independence, there’s no longer any need for the cover.
Whole-of-life insurance, on the other hand, is a policy that remains in effect – with monthly premiums due – for the rest of your life. Provided payments are kept up to date, there’s a guaranteed final lump sum. This is the type of cover more usually taken out later in life, and it is sometimes called over-50s insurance.
What are the signs that life insurance may be right for me?
If you’re ever curious as to whether or not life insurance is right for you, try asking yourself this question – would your passing away have severe financial consequences for your family or anyone else?
For example, if you’ve bought a house on your own, there may seem little need to take out life insurance. However, if you take out a joint mortgage with a partner, term insurance could be a way of ensuring your other half can remain in the home in the event of your death.
Having children is perhaps the most common reason for taking out term insurance: putting the right cover in place can mean that they, as well as their surviving parent, won’t suffer financially should you pass away.
When it comes to whole-of-life insurance, there are different factors to consider: for example:
- Your partner receives a small pension, and would be in financial difficulty if you died
- There’s a potentially large inheritance tax bill to pay in the event of your death. Whole-of-life insurance could cover an inheritance tax bill.
What kind of options could I have with term insurance?
Whole-of-life policies are typically very straightforward to set up. This is because premium levels relate to the level of cover you want as well as your age.
With term insurance, on the other hand, there are other variables to consider. Just to make things more complicated, there are three types of term insurance – decreasing term insurance, level term insurance and Increasing term insurance.
Decreasing term insurance
Because term insurance is focused on mortgage repayments, the potential payout offered by some policies decreases over time. This is done to reflect the fact that the mortgage balance is probably falling, too.
This type of cover is known as decreasing term insurance, or sometimes mortgage life insurance.
Level term insurance
As the name suggests, the payout level remains the same throughout the mortgage term.
Increasing term insurance
This type is less common, but some policyholders may want potential payouts to rise to reflect inflation, for example.
Taking all of that into account, the premiums on decreasing term insurance will be lower than on the other types.
You may also be able to decide whether you want your policy to pay out a single lump sum, or to make regular smaller payments over a longer period.
Do both my partner and I need life insurance?
Often, families decide only to insure the life of the main breadwinner. If one partner earns less but does more of the childcare, however, it could be also worth insuring their life – after all, their death would also place an additional financial burden on the family, even if it’s not as large.
When couples both take out life insurance, they can choose a joint-life policy or two separate policies. A joint-life policy pays out on the first death, but then expires, while with two separate policies, the surviving partner remains covered. Having separate policies is likely to be more expensive, but can provide significantly more financial security for the family.
What factors affect life insurance premiums?
It’s very difficult to give even a vague idea of how much a life insurance is likely to cost you. This is because there are a wide number of factors that dictate premium levels – especially when it comes to term insurance.
The main ones are:
- The level of cover: Clearly, the more you want the policy to pay out, the more it will cost. Many people limit cover levels to the size of their mortgage, but consider also if your family might need extra money to cover living expenses or education costs.
- The age when you buy: Particularly for term insurance, how old you are when you take the policy out will have a big impact on premiums. From the insurer’s point of view, the younger you are, the less likely they are to have to pay out during the term.
- Your health: Again, you are much more likely to face health checks when you take out a term insurance policy. You’ll be asked about your lifestyle, such as whether you smoke or drink, as well as any existing medical conditions. In general, though, any medical conditions that develop after the policy is up and running should not affect your premiums – provided you don’t let the policy lapse or try to change insurer.
Do you think life insurance is right for you? What are your feelings on insurance in general? Tell us all about it in the comments!
Disclaimer: This article’s for general information only. MoneyAware and StepChange Debt Charity are not connected with this company, and we make no money, or receive anything in kind, from publishing this article.