A beginner's guide to life insurance

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Are you considering taking out life insurance to help protect your family, but are unsure where to start? We set out some of the key points.

Should something happen to you, your family and other beneficiaries may face extreme pressures after you’re gone – both emotionally and financially. These difficulties may be exacerbated if you failed to make adequate financial arrangements before passing away.

The money from a life insurance payout could potentially be used to meet any number of financial obligations and help your family maintain their current standard of living.

As well as helping dependents cover day-to-day expenses or providing for children’s futures, this money could go towards paying off any debts such as a mortgage.

We take a look at the main types of policy available.

Whole-of-life insurance

This type of policy is intended to remain in place for the whole of a person’s life and, in most cases, requires the insured person to pay premiums until he or she passes away.

Some whole of life policies pay a set amount upon the policyholder’s death. Bear in mind, the value of the payout could be significantly reduced by inflation if that person survives for a number of years – or even decades.

However, other whole of life policy types such as ‘with profits’ and ‘unit linked’ are tied to investments. This means the amount of the payout may depend on how well the fund performs.

Term insurance

Term insurance is designed to provide beneficiaries with a lump sum if the policyholder passes away within a pre-determined period of time. However, the policy won’t pay out if the insured person survives beyond the policy term. In many cases, this is the least expensive kind of policy and also the most popular.

Many people buy this kind of cover in conjunction with their mortgage with the term set as the same duration as their loan. Alternatively, the term of the policy could expire when any children are no longer financially dependent.

Here are the main types of term life insurance:

Level term: This pays out a set amount if the policyholder dies at any time during the term of the policy.

Increasing term: This kind of policy is intended to help counteract the effects of inflation as the amount of the payout goes up each year.

Decreasing term: With this type of insurance, the amount of the payout decreases over the term of the policy. Many homeowners take out this kind of cover – as the amount outstanding on a mortgage decreases, the beneficiaries may require a smaller payout.

Family income benefit: This pays an annual tax-free income to the beneficiaries for the term of the policy – rather than a lump sum upon the policyholder’s death.

How much will it cost?

The cost of life insurance premiums varies according to personal circumstances and depends on a number of factors such as age, gender, medical history, weight and whether or not someone smokes. Those who have a dangerous job or indulge in extreme sports may also face higher premiums.

Watch out for the small print

As with any insurance policy, it’s always wise to check for exclusions and technicalities.

Some policies may not pay out if the insured person dies because of a medical condition that had already been diagnosed prior to taking out the policy. Although every policy is different, others may not pay out if the policyholder had been taking part in certain extreme sports.

Critical illness insurance

While looking to take out life insurance, it could be worthwhile considering adding critical illness cover the policy.

This type of insurance applies if the policyholder develops a medical condition, such as cancer, which would stop him or her from earning an income.

A lump sum would be paid out upon the diagnosis of the disease or illness.

How to lower the cost of life insurance

There are a number of ways to reduce the cost of life insurance premiums.

• Losing weight or stopping smoking could reduce the cost of premiums as health is an important factor insurers use when calculating risk
• Buying life insurance when young and healthy may result in lower premiums
• Comparing a range of quotes can be useful when buying life cover as premiums vary between providers
• Because the life insurance market is highly competitive, people may well get a better deal on their premiums if they consult an independent financial adviser

**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**

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