Taking out a life insurance will help ensure that your dependants don't struggle for money if the worse were to happen, and you died. Many fail to recognise just how vulnerable people are, and as a result don't give much thought into what could be the most important type of insurance you can invest in. Looking to find out more about life insurance? You've come to the right place...
'Term' Life Insurance
'Term Insurance' policies pay out when the policyholder dies within a set term of time. Generally policies run for 10 – 25 years, but you specify exactly how long you want them to be. Should you die the 'sum assured' is paid to your surviving relatives, although some providers actually pay out before, in the event of a terminal illness being diagnosed.
Some policies have a deferred start date, which means that if you die shortly after taking out the policy they won't pay out. As such you should always scrutinise the details of the conditions as you would with any insurance policy or contract.
If you live beyond the agreed term, then the cover simply ends, with you receiving no financial benefits. You are of course free to take out another policy once one has ended, assuming that you have no extenuating health circumstances.
Types of Term Life Insurance
There exist three main variations of term insurance policy:
•Level Term Insurance – Here the guaranteed payout (sum assured) is the same regardless how far into the policy a claim is made
•Decreasing Term Insurance – You guessed it – the sum assured decreases in value the longer into a policy the claim is made
•Increasing Term Insurance – The payout potential increases as the policy matures.
Naturally you'd think that 'increasing' or 'level' term insurance are the best options, but decreasing term insurance also has it's uses. It's the cheapest of the three and useful for people who have a repayment mortgage, as it allows them to satisfy the lenders requirements with minimum cost. Level term insurance is the most common choice, but if you can afford the additional cost of an increasing term policy, you can expect the payout to rise by typically 5% per year, which is designed to combat the rising living costs year-on-year.
Whole Life Assurance
As well as term length policies, whole life insurance exists which is designed to cover you for the whole period of your life. Insurers tend to use the word 'assurance' for this type of policy as dying is an inevitability, as opposed to just being a possibility within a term policy. Due to this certainty, pay-out is obviously guaranteed, and as a result you can expect to pay a much higher premium for the cover.
Whole life policies are far more complicated than term policies, as part of your payments are used to put into investment funds. This helps to generate enough cash for the provider to be able to pay it's customers when the time comes. As a result your descendants may receive less than expected if said investments have underperformed.
Tax planning is the main reason a few people us whole life policies, and as such it's not really designed for premature or unexpected loss. If this is your main concern, you should look further into a term length policy to suit your needs.
Over 50's Life Insurance
insurance for over 50's tends to have an upper age limit of 75, although some providers extend this up to 85. The great thing is that everyone will be accepted within this age bracket without the need for a medical – even if you have or had ill-health.
Policies normally have a deferment period of 12-24 months, meaning no pay-out if you die within this time, but premiums paid until that point will be refunded to your estate.
The sum assured is generally pretty low, but the low premiums you'll pay will reflect this. There's also the added benefit that they work in a similar way to a whole life policy, in that there is no expiration date.
Lots of people take out this type of policy to cover their funeral expenses, but the obvious drawback is that you could end up paying far more than you could simply save away, if you end up living too long!
The better providers allow you to stop paying premiums when you reach around 90, with them still guaranteeing payment after you die.
Check out our Beginners Guide to Life Insurance if you still have questions.