A complete guide to life insurance. Here we explain the key aspects, costs, beneficiaries, term life insurance, and the lifelong cover offered by whole life insurance.
Understanding life insurance
Life insurance is a financial safeguard that provides a lump sum to your loved ones in the event of your premature death, or, depending on the policy, diagnosis of a terminal illness. The payout can help with mortgage repayments or maintain your family's standard of living.
Three distinct types of life insurance
- Level cover
- Decreasing cover
- Whole of life insurance
Level cover and decreasing cover are types of term life insurance. Your choice between the two affects your sum assured, the cost, and which financial needs the policy is best suited to. Decreasing cover is suitable if your aim is to settle a mortgage if you die during the policy term. The value, like a mortgage, reduces over time, while the premiums stay the same, which is why it's often referred to as mortgage protection insurance. With level cover, the amount paid out on a claim remains the same throughout the term.
Whole of life insurance is a permanent form of cover that guarantees a payout to your beneficiaries regardless of when you pass away. Unlike term insurance, which provides cover for a specific period, whole of life insurance provides lifetime cover.
However, remember that term life insurance has no cash value, if your payments stop, so does your cover. It's a one-time payout policy that terminates once it pays out.
Estimating life insurance costs
The premium of your policy depends on several variables:
- Age. Older individuals typically pay higher premiums due to increased health risks.
- Lifestyle. Unhealthy habits such as excessive alcohol consumption or obesity can increase premiums.
- Health. Pre-existing medical conditions can affect your premium.
- Family medical history. A history of serious medical conditions in your immediate family can influence your premium.
- Occupation. Higher-risk professions may attract higher premiums than lower-risk roles.
- Smoker status. Smokers, including those on nicotine replacement therapies or vaping, usually pay more due to the associated health risks.
- Cover duration. Policies with longer terms may be pricier than shorter-term ones.
- Cover amount. The higher the sum assured, the higher your premium.
Always answer honestly when applying for a policy, inaccuracies can jeopardise your claim and ultimately hurt your loved ones.
Coverage details of life insurance
Life insurance is designed to provide financial stability to your family on your death. If you're dealing with a severe illness affecting your financial position before that, consider critical illness cover. The specifics of coverage vary among insurers, but the underlying principle is consistent.
Deciding the beneficiary of your life insurance
You usually have control over who receives the insurance payout after your death. In joint life insurance, the surviving policyholder generally receives the payout unless otherwise specified. You can even split joint policies into single ones following separation.
With single life insurance, the payout goes to your estate. Placing your policy into a trust can allow you to nominate beneficiaries, offering potential tax benefits and faster payouts. Writing a will is another option, although it may not be as tax-efficient.
Seek independent legal and financial advice before placing your policy into a trust or writing a will.
Determining the need for life insurance
The need for life insurance depends on individual circumstances. If you have dependants, life insurance offers a financial cushion in your absence. The payout can help clear the mortgage, cover child-rearing expenses and handle monthly bills. If you haven't secured financial provision for your dependants, life insurance is well worth considering.
As with all insurance policies, conditions and exclusions will apply.