You wouldn’t think twice about insuring your car or your home to protect against damage, yet insuring yourself is something that’s often brushed aside or not considered at all. This is understandable as no one wants to think about dying but how would your loved ones cope financially if you were to pass away?
Life insurance provides essential financial support for your loved ones when they need it the most. Having this protection in place offers peace of mind that your loved ones will be protected and their financial burden reduced should the worst happen to you. But what is life insurance exactly and how does it work?
What is life insurance?
Life insurance provides financial support for your loved ones if you pass away or become terminally ill. It pays out a lump sum that gives them essential help with living expenses when they need it most.
The funds can be used to make mortgage payments, cover funeral costs, pay monthly bills or help maintain their standard of living. With this protection in place, you can have peace of mind that they will have a financial safety net when you’re no longer around.
How does life insurance work?
Life insurance reduces the financial burden on your family if you pass away during the policy term. Some life insurance policies also cover you if you’re diagnosed with a terminal illness and have a life expectancy of less than 12 months.
A lump sum is paid out to your loved ones, with the amount depending on the level of cover you have chosen. It’s important to consider how much your loved ones would need to maintain their standard of living if your income were no longer available. The amount of cover is known as the sum assured.
Then, you need to decide how long you want the cover for, which is the policy term. For example, you may decide to choose a policy term of 25 years to match the term of your mortgage. Should you die within that term, the insurance provider will pay out the sum assured to your loved ones.
Single and joint policies
Both single and joint policies are available. You can choose a single policy to cover yourself and you then nominate your beneficiaries. Alternatively, you may prefer a joint life insurance policy.
A joint life insurance policy is a good option if you’re in a couple or a business partnership. You’re both covered in a single plan and it’s usually cheaper than taking out two single life policies. If one of you passes away during the policy term, the remaining person will receive a lump sum payment. With this arrangement, just be aware that the insurance provider only pays out once.
What is life insurance used for?
As mentioned earlier, life insurance helps your loved ones manage financially when you’re no longer around to support them. The payout can be used for various expenses, such as:
- Mortgage payments
- Other debts
- Funeral costs
- Household bills
- Childcare costs
- Education costs
- Everyday living expenses
This type of cover can considerably reduce the financial strain felt by your loved ones.
What types of life insurance are available?
There are three main types of life insurance to consider: level, decreasing and increasing cover. These cater to different financial needs.
- Level: You choose a fixed amount that’s to be paid to your loved ones as a lump sum in the event of your death during the policy term. You decide how long you want the policy to run for and your premiums remain the same throughout the term. This is the simplest option and helpful for budgeting.
- Decreasing: This cover is typically used with repayment mortgages but can be used with other financial obligations that decrease over time. The level of cover reduces each year as the outstanding debt is reduced. For example, as the outstanding balance of your mortgage decreases, the amount to be paid out should you pass away also reduces. If you pass away towards the beginning of the term, therefore, your loved ones will receive more than if you pass away further into the policy term.
- Increasing: This type of cover increases each year to ensure your loved ones are protected against inflation. That way, the sum received by your loved ones is reflected in real terms and allows for increased living costs. Your premiums increase as the level of cover increases over time.
Over 50s life insurance is also available. This type of cover enables you to take out life insurance if you’re aged 50 or above without having to pass a medical check or answer any health-related questions. Rather than having a specified policy term, your cover remains in place until you pass away. Your premiums stay the same throughout.
Who can benefit from life insurance?
Life insurance is beneficial if you have dependents who would struggle to cope financially if you were no longer around. These dependents may include a partner, your children or your parents. If you’re a homeowner, for example, a life insurance payout can help your loved ones cover the mortgage payments so that they can have the security of staying in the family home.
How much does life insurance cost?
The cost of life insurance depends on different factors, which can all affect how much you pay for your premiums. As well as the amount of cover you want, other factors include your:
- Age
- Health
- Height and weight
- Family medical history
- Smoker status and alcohol usage
- Occupation
- Lifestyle
- Policy length
Generally, the younger and healthier you are, with a low-risk occupation and lifestyle, the cheaper your premiums are likely to be. This is because you pose less of a risk compared with someone older who is more likely to develop illnesses or have pre-existing medical conditions. If you have a dangerous occupation or have a risky hobby, this can increase your premiums.
Do you need life insurance?
Life insurance isn’t for everyone and it depends on your circumstances. If you have someone who relies on you for financial support, then this type of cover can give them much-needed protection when you’re no longer around.
For expert and impartial advice, speak with one of our mortgage and protection specialists. They can talk through your concerns, your personal situation and your preferences to help ascertain if life insurance is suitable for you or whether a different form of protection would be better for you.
They can help ensure that you have the right level of cover in place over the right term and at an affordable price. Give us a call on 01322 907 000 to provide your loved ones with financial protection and greater security for the future.