Life insurance what is it & how does it work?
Life insurance is the simplest, most popular. A cost-effective way to financially protect any dependents in the event of your death. While it won’t help those left behind to get over their loss, the benefit of a lump sum. In most cases, tax-free will guarantee your family isn’t deprived of funds during an already stressful time.
It can be split into two main types, known as whole of life insurance and term life insurance. In essence, as the name suggests, the whole of life insurance provides cover for the lifetime of the policyholder, whereas term life insurance provides cover for the duration of an agreed period in time. For all policies, it’s crucial to ensure that premium payments are kept up to date to keep cover in place.
Whole of life insurance
Whole insurance of life tends to be the more expensive option, though often has the advantage of being more flexible. It can fulfill many purposes including personal protection, family protection, and inheritance tax planning. And can be combined with a term life insurance policy to cover specific debts as required.
Term life insurance
A simpler option, term life assurance offers basic cover for a set number of years, usually at a low cost. A term life insurance policy requires a regular premium payment. And pays out a lump sum on the policyholder’s death providing this occurs within the term of the policy.
Term life insurance cover can be further categorized into these types:
Flat-rate (or level) cover – offers a set amount of cover for the policy term, fixed from the outset. Decreasing (or mortgage protection insurance) cover – cover decreases over the term of the policy. Often in line with diminishing mortgage debt.
How much cover do I need?
It is important to correctly identify your dependent’s financial needs to establish just. How much insurance of life cover to arrange. A general rule is to choose a policy providing at least ten times your salary, but more may be appropriate.
Dont overlook factors like:
Mortgage repayments Replacing the primary earner’s salary Replacing childcare Education expenses Outstanding debts Support for a business partner
What do I need to look out for?
Before signing anything, look carefully at the terms and conditions of your proposed life assurance policy giving particular attention to any regulations pertaining to payouts. Some policies may not, for example, payout if death is caused by participation in certain dangerous sports or activities.
In the case of index-linked policies which allow for economic change, it’s important to establish whether the policy is linked automatically or whether there is the need to opt-in to linkage each year; failure to do so could result in being locked out of future linking.
Though life assurance payouts are usually tax-free, there are circumstances where taxes will apply. A life insurance policy can be placed in trust to protect revenue and provide payment more quickly, though this is a complex issue that needs professional advice for clarity before proceeding.
A joint-life policy is a popular and often less expensive option for couples that covers the two of them simultaneously, with options for payout on a first-death or last-survivor basis.
How much will it cost?
The cost of each different policy offered by a life assurance company varies widely and depends on a number of factors: the type of policy, the length of the policy term, the size of the death benefit, the flexibility of the policy, number of people covered by the policy and so on. The only certainty is that the longer you delay getting life insurance, the more expensive the premiums will be!