Life insurance exists to support your loved ones financially, if the unthinkable happens and should you die or receive a terminal diagnosis. What would happen to your family if you were no longer around is a major concern for anybody, particularly for those who are the primary source of income for their family and dependents.
Life insurance is one of the more flexible insurance products on the market. It’s down to you to select the amount of cover you’d like and the term length of the policy. You can take it out under a single name or joint names, and usually have the option to pay your premiums either monthly or annually.
What’s Covered
Each policy varies depending on the insurance provider. Typically, a life insurance policy provides the following cover:
- if you die within the length of the policy, your family will receive a payout
- if you’re diagnosed with a terminal illness, with a life expectancy of less than one year, you can usually receive a lump sum before you die, to help you and your dependents cope financially during such a difficult time. This usually only applies if a doctor has given you less than 12 months to live, though exact terms vary among providers
- often there is the possibility to add Critical Illness Cover either for free or as a paid extra, in the event you develop a critical illness that prevents you from working
- some policies may include an Accidental Death benefit.
Life cover ensures that your loved ones have the funds they need to fulfil their financial obligations if you receive a terminal diagnosis or pass away. There’s typically no obligation for your family to use the money in a certain way, but some of the intended purposes include:
- To pay the mortgage
- To go towards everyday living expenses, such as bills and food
- To cover children’s school fees or expenses.
Exclusions
Many policies come with some significant exclusions. These might be to do with the circumstances surrounding your death, or factors that make you a high-risk person. Some typical exclusions include:
- taking your own life within the first year of the policy
- some illnesses. Many insurers provide a list of terminal illnesses they cover as well as a definition of what they consider a terminal illness. It’s a good idea to scrutinise this list before you take out a policy
- if your payments aren’t up to date, you won’t have cover
- those who work in a ‘high risk’ job or take part in ‘high risk’ leisure activities
- people with serious health conditions, such as diabetes or cancer
- heavy smokers
- death related to drug or alcohol misuse, involvement in war or terrorism
- death which is the result of gross negligence or a reckless act.
Many life insurance providers retain the right to cancel your policy or refuse to pay out if they find you had hidden material facts or lied when you applied for your cover. Make sure you provide all the information asked of you as honestly as you can.
Policy Types
There are a wide range of life insurance policies on the market. Which one you go for will depend on your individual circumstances and the amount of cover you need. Broadly, there are five principal types of life insurance policy.
Level-Term Life Insurance
A level-term life insurance policy typically pays out a fixed amount of money over a fixed period of time, both of which you specify when you buy. You might agree an insured sum of £200,000, for example, which your beneficiaries will receive if you die within the term specified by your policy, which might be 18 years. It can help cover any debts your dependents may have after your passing, such as an interest-only mortgage. If you are terminally ill, you will receive the payments. If you die within the chosen period, your beneficiaries will receive a lump sum.
Your premiums will either be guaranteed or renewable. Guaranteed premiums will remain the same throughout your policy, whereas renewable premiums may change if your insurer decides to increase their prices later on. The older you get, the more your premiums may increase, owing to the increase in risk for the insurer.
Decreasing Term Life Insurance
This type of policy is also a fixed term policy but is designed for people whose financial commitments reduce over time. This might be the case for somebody repaying a mortgage, for example. As the payout reduces as time goes on, this type of insurance is generally cheaper than level term insurance. Many mortgage lenders insist that a life insurance policy of this kind is in place before they lend you the funds.
Whole of Life Insurance
When you take out a whole of life assurance policy, you generally pay a premium either monthly or annually. Your insurance provider will use some of the premium towards the upkeep of the policy and invests the remaining amount. Your cover exists for as long as you pay the premium.
This policy type uses an investment model, which makes it more complicated. There are two main types of whole of life cover:
- Balanced cover: this is sometimes known as standard cover. Your provider sets the premium at a sum high enough to remain fixed throughout the policy. Similarly, the payout remains fixed and will be a figure agreed when you sign up for the plan.
- Maximum cover: this cover usually starts out cheaper, as most of your payment goes on your policy rather than being invested. However, after a pre-arranged timeframe, your insurer will review your policy, and may increase your premium if they find you to be more of a risk.
Joint life Insurance
This type of policy covers two people, but only pays out once. It’s therefore typically taken out by a couple, to ensure the financial security of the other if the first person dies during the policy term. The payment tends to be a lump sum, which the survivor receives when the other policyholder dies.
Something to note is that in a ‘first death’ policy, there’s no further cover for the survivor if the other policyholder dies. They will have to seek a new life insurance policy after the death of the first policyholder if they wish for further cover.
It is possible with some providers to take out a ‘second death’ joint life insurance policy, which works slightly differently. A second death policy can ensure the financial security of dependents of the pair, usually a couple, rather than each other. In these policies, a payout only occurs after the death of both policyholders.
Over-50s Life Insurance
These type of plans typically offer a smaller payout than other forms of life insurance, as you likely have fewer financial commitments and financial dependents the older you get. People usually take out an over-50s life insurance plan between the age of 50 and 80. Beneficiaries tend to use the payout towards things such as funeral expenses.
Your premium price is guaranteed, which can be comforting security, but if you live for a long time, there is the possibility that you will pay more into the policy than the policy pays out.
Choosing a Policy
Which type of cover you get is a personal choice. It depends on the amount of security you want and need, and many individual factors such as how much your dependents rely on you financially, your risk of dying and how much debt you have.
The attraction of a whole of life policy is that the payout is almost always guaranteed. This guarantee can provide a higher level of security for the policyholder, knowing that their loved ones will receive a fixed sum once they’re gone. A whole life policy tends to be more expensive, however. It is also worth considering that if you live to an elderly age, you may have fewer people financially dependent on you, which no longer requires as large a payout.
A decreasing term policy can be an excellent option for younger people. The younger you are, the less you will pay, and this amount will only decrease over time as you progress through your policy. Nearly a third of policyholders take out insurance during the ‘Mature Independent’ stage of their lives, which refers to the time when their children have flown the nest. Policyholders at this stage of their life typically pay premiums of around £25 a month. However, younger people typically pay almost £10 less a month, which will decrease further over time, meaning they can make significant annual savings by taking out their policy earlier.
Typically, joint-life policies tend to be cheaper, as two people are effectively sharing the same policy. It also tends to be more straightforward than a single person policy, as the payout automatically goes to the surviving partner. However, it is worth considering whether you both require a life insurance policy. If only one of you works, it may be redundant to insure you both for the same amount. Similarly, if one of you has a pre-existing medical condition, it could drive up both your premiums.
You also cannot divide a joint life insurance policy, if you and your partner split up. In most cases, you would need to cancel the existing policy and set up two new ones. As you will likely be applying for the new insurance at an older age, your premiums may be higher, too.
Over-50s life insurance can offer peace of mind to older people. Over-50s aged between 50 and 79 are guaranteed by most insurers onto a policy of this kind, regardless of their health or lifestyle. There’s no need to take a medical exam, or even answer any questions related to health. One drawback of this type of policy is that you typically need to have paid into the policy for a minimum period of time, usually one or two years, before the insurer will provide a lump sum when the policy holder dies. Many people on the younger side of the over 50s age bracket might consider term life insurance, instead.
Assessing the Scope of Coverage Required
Again, how much cover you need depends on your specific circumstances. The more you want to take out, the more you will have to pay in premiums. That said, you don’t want to underestimate the amount of money your family needs, or you risk leaving them without enough.
Most providers tend to recommend that if you have children, you cover ten times the annual income of the primary breadwinner until the children have finished fulltime education. Ten times your yearly income may seem excessive, but it’s worth remembering that inflation can mean the payout is worth less in 10 years than it is now, a high insured sum can help to absorb the impact of inflation. The multiple of ten is only a rule of thumb, and many people take out less or more, depending on what they can afford to pay in premiums. Some things to consider when you choose a sum to insure are:
- how much would be needed to cover your mortgage
- how much your dependents would need to make up living expenses, including bills, childcare costs and other expenses
- remaining costs for which they rely on you, such as your children’s education costs
- anything that would incur extra costs if you weren’t around, such as if you usually take care of an elderly parent, you might want to factor in money to pay for a carer, or if you share the childcare with a partner, they may need to pay for extra childcare if you are no longer there
- any of your dependents’ future plans which rely on you financially, such as a child going to study at university.
To help you work out the above costs, you can use an online life insurance calculator, which asks you questions based on your income, mortgage payments and other expenses, and offers you a suggestion of how much cover to take out based on your personal circumstances.
How Long Should the Term Be?
If you’re mainly putting your cover in place because of your children, then the policy should last until at least the time that they are no longer reliant on you. Generally, this is considered the time up until they finish fulltime education. If you are planning to have more children, you may want to factor that in when taking your policy out. Estimate at what point these potential children will grow up, as this tends to be easier than trying to extend your policy later down the line and cheaper than taking out a new policy later on.
If you are taking out life insurance to cover a partner, it’s often advisable to choose a term length that covers your partner until they reach pensionable age. You can select any length of policy that suits you.
Calculating Policy Cost
Varying factors play into how much you pay for a life insurance policy, including:
- the sum you are looking to insure – the higher the sum, the higher your premium tends to be
- the length of your policy. Longer policies typically mean higher premiums
- the number of bolt-ons you choose to add to your policy, such as a critical illness cover
- your risk to the insurer, including your state of health, medical history and other lifestyle factors.
Principal factors that come down to your health include your height and weight, your smoking habits and how much alcohol you consume, although providers work out the premiums they charge using different methods. As they all use different calculations, it’s a good idea to compare their policies. To obtain a quote, you will generally need to provide the following information:
- details about you: your name, date of birth, etc.
- details about your lifestyle: whether you are a smoker or use nicotine substitutes
- information about your health and medical history: details about your current state of health, past medical issues or any pre-existing medical conditions
- the length of cover you need (for example 18 years, or a whole life policy)
- how much protection you want (e.g. ten times your annual salary, or however much you decide you need)
- details of any joint policyholders, if you are looking to take out joint life insurance.
Final Thoughts and FAQs
It’s never nice to think about the worst-case scenario. While life insurance can’t ease anyone’s emotional suffering, it can protect your family and/or dependents from a loss of income and financial support for their future. Do you have more questions on life insurance?
