Life insurance guide
It’s never comfortable to think about, but you should consider making provisions for your loved ones should something happen to you.
Life insurance (or "assurance") is a policy that pays out a lump sum when the policyholder dies. Its aim is to prevent the dead person's partner or dependents from struggling financially.
The "sum assured" is the amount or cover you have or the amount the policy will pay out when you die.
Life insurance is only really necessary if you are married or have children. The idea is the payout will support your family financially if you die at a time when they rely on your salary.
Your dependents might use the payout to cover mortgage repayments, replace your salary, pay childcare or education expenses, or pay university costs.
In short, life insurance should provide enough money for your family to carry on their lifestyle as it would have been if you were still alive.
If you're not married or cohabiting and don't have children then there is no real need to have life insurance.
Types of life insurance
There are several different types of life insurance policy.
Term insurance pays out if you die within a given time. If you survive to the end of the policy's term, you won't get a payout. How long the term is for depends on your needs. For example, it might be until you have paid off your mortgage or until your children have grown up. The sum that will be paid out is guaranteed and will be the same whenever the policy pays out.
Renewable term insurance is similar to term insurance but on the expiry date there is an option to continue the policy.
Decreasing term life insurance (or mortgage life cover) is a cheaper option. This is because the potential payout falls each year until it's zero at the end of the term. Decreasing term life insurance is typically used to protect mortgage repayments; as you pay off your mortgage over the years, the less will be left for the policy to pay off.
A whole-of-life policy guarantees to pay the sum assured on the death of the person, whenever it occurs. This is more expensive than term insurance as the insurer will always have to make a payout at some point.
Convertible term insurance is level term insurance with the option to revert to a whole-of-life policy or endowment policy when the original term comes to an end.
Factors affecting life insurance costs
When you take out a life insurance policy you will pay a regular monthly premium. How much this will be depends on how much cover you want, how long you want it for, your gender, the job you do, your health and whether you smoke or not.
Premiums can be either guaranteed or reviewable. Guaranteed premiums will stay the same throughout the policy but reviewable premiums, as the name suggests, are reviewed at regular intervals and could increase.
Reviewable premiums initially work out cheaper but because they are likely to go up over time, the overall cost will probably end up being more than it would be with guaranteed premiums.
Generally, the younger you are when you take out a policy, the lower the premiums will be.
Some life insurance policies allow you to add on certain other protection products such as critical illness cover for an extra cost. Some policies also allow you to pay extra for "waiver of premiums" which means your premiums will be paid for you if you are unable to work for health reasons.
Buying life insurance
As with any type of insurance it's a good idea to shop around for cover as costs and policies can vary considerably. Insurance companies, mortgage lenders and banks all sell life insurance but you might want to use a broker or financial adviser to do the shopping around for you and give you advice.
Make sure you tell the truth when you take out a policy. If you lie about being a smoker, for example, the insurer can refuse to pay out on the event of your death regardless of whether it was smoking-related.
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