The abiding principle of a life insurance policy – to provide financial help to the family of the deceased – has remained intact since the very first policy was issued over 300 years ago.
Now, of course, there is a huge choice of different policies – and providers – and that can make it difficult to choose the right one for your needs and budget. Remember that the policies will only pay out if you die or are diagnosed with a terminal illness: they will not cover you for a critical illness, and they lapse as soon as you stop making payments.
There are two main types:
- a “Term Life Insurance” policy will run for a fixed period and only pays out should you die within that time frame.
- a “Whole of Life” Policy will be valid for as long as you keep up payments.
On the death of the person covered by the policy, the insurer will normally pay dependants a lump sum or regular payments. Many insurers will also make that payment upon the diagnosis of a terminal illness, and where the policyholder has less than 12 months to live.
How much you pay for your policy will depend on how much risk you pose the underwriter: the younger and healthier you are, in general terms, the less you can expect to pay in premiums. Insurers may also exclude cover for a death related to pre-existing conditions or self-inflicted conditions, such as alcohol or drug abuse.
While the more you pay in premiums, the higher payout your family can expect, you will find variations in quotes between providers. Do read the terms carefully when comparing them, as their exclusion terms can make a difference to your decision. Remember also to answer questions on your health truthfully – as doing otherwise could result in a disputed or rejected claim.
There are some variations available: for instance, Term Assurance may be renewable, so instead of (say) taking out a 20 year policy you can take out a five year renewable policy that is guaranteed to be renewable at the end of each successive five years – check the policies you are offered if this would be a preferable option for you.
How much should you insure your life for?
That depends entirely upon your available funds and also the amount your family would require should you pass away. Remember also that it’s not just the “breadwinner” in the family whose loss would cause financial hardship, and also be confident that you can keep up the payments once started: the cover will lapse if you miss payments.
Mortgage Life Insurance
One variation to consider is simply to cover the biggest single financial liability your family may face: the mortgage. Again there is a choice of policies between “level cover” where the amount covered never varies; “decreasing cover”, where the amount steadily goes down over the years to reflect lower mortgage liabilities; and “increasing cover” where the amount covered actually rises. These policies are not suitable for interest only mortgages.
Death in service
Before you make a decision on how much life insurance you need, check whether your employer has “death in service” cover in place for you. It works in just the same way as a conventional policy, but with the employer paying the premiums, and is not usually dependent upon the individual losing their life as a result of their work – simply dying while in their employ. One cautionary note: Death In Service cover alone may not be enough, and if a healthy individual relies upon it, gets an illness and then leaves the employer he/she may not be able to secure affordable individual cover.
Critical illness insurance
The chances of someone becoming seriously ill during their working years is far higher than those for them dying, so critical illness cover is another option to consider if you have limited funds – or if you want cover for both contingencies. These polices will vary considerably in what they cover, for how long and how much they will pay out, so make sure you are comparing “apples with apples” when making your decision.