Life Insurance

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A comprehensive guide to life insurance.

If you want the peace of mind of giving your loved ones financial security when you die, you may want to consider taking out a life insurance policy.

We receive numerous enquiries relating to these products every day. Read on to find out exactly what life insurance is, how it works, and whether it’s a suitable product for you.

Jump ahead to the following sections:

What is life insurance?

Life insurance pays your dependents money if you pass away. 

It is designed is to provide you with the reassurance that your family will be looked after financially if you are no longer there to provide for them.

How much money is paid out will depend on the type and level of cover you opt for. When you take out a policy, you decide how much cover you want, and whether the funds are paid as a lump sum or through regular payments.

How does life insurance work?

Before you take out a life insurance policy, you will need to decide on a provider. 

Much like you’d carry out a home or car insurance search, you can compare quotes from different providers to find the most suitable product for you.

The majority of insurers allow you to choose your policy based on the value of the payout you select, or what “premium” you can afford to pay each month.

The quotes you receive will depend on your circumstances; the higher the requested payout, the higher the monthly premium. If you can’t afford a high monthly premium, expect the payout value to be capped.

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Why is life insurance so important?

While life insurance can be a helpful, sometimes fundamental investment, it’s not necessarily essential for everyone.

It’s usually a good idea if anyone relies on your money to live. If you die, the funds your family would receive from the government may not be sufficient to provide them with what they need.

So, if you have any of the below, it may be a good idea to consider taking out life insurance:

  • A partner that relies on you financially.
  • Children that are at school.
  • A family living in a house with a mortgage in your name.

On the other hand, there are certain situations in which taking out a life insurance policy could be an unnecessary expense. For example, if:

  • You’re single.
  • You earn a low income and eligible for state benefits.
  • You have a partner that earns enough to provide for your family.

It’s also important to consider whether your loved ones receiving a life insurance payout would affect any means-tested benefits they would otherwise receive. 

If you’re not sure whether taking out life insurance is a suitable decision for you, get in touch for independent financial advice.

How much does life insurance cost?

Aside from requested payout value and monthly premium budget, there are a number of more personal factors that will impact how much can expect to pay for life insurance. In many cases, it can be very cheap.

As little as £1 a month could provide your loved ones with sufficient financial protection in the event of your death. Individual circumstances that can influence the cost of a life insurance policy include:

  • Your age.
  • Your health.
  • Whether you smoke.
  • How much you drink.
  • Other lifestyle factors.
  • What the policy covers.
  • Policy length.

So, the younger and healthier you are, the cheaper your policy is likely to be. Of course, the monthly premium you have to pay will vary by provider, so make sure you use a whole-of-market expert to find the most suitable deal.

What types of life insurance are there?

The two main types of life insurance available are:

Term life insurance policy

This type of policy runs for a fixed period, or “term”, perhaps 5, 10, 15, or 25 years. 

Once you’ve chosen a term and a level of cover, you pay a monthly premium for the duration of the policy. 

You can choose between a “level term”, “decreasing term” or “increasing term” plan. Level cover keeps your payout the same, whereas decreasing cover reduces your allowance over time, but the premium tends to be cheaper.

Increasing term plans mean the cover can either rise by a set amount each year, or by RPI (The Retail Prices Index) to ensure the cover keeps up with inflation. The premium with these types of policies will also increase.

This type of policy will only pay out if you pass away during the policy period, and there is no lump sum payout when the term comes to an end

Whole-of-life insurance policy

Whole-of-life cover guarantees that your insurer pays out a lump sum to your dependents whenever you die, rather than within a specified time frame or “term” – provided you keep up with your monthly payments.

These policies tend to be quite expensive, purely because the insurer knows it will definitely be paying out on the policy at some point.

Other types of life insurance policies

There are also more niche types of insurance available, such as over 50s life insurance. Some policies have age restrictions for claims, in which case you might consider a more specialist product.

As the name suggests, you can only apply for this type of policy if you’re over the age of 50. You select the level of cover, and pay a set monthly premium.

What is included in a life insurance policy?

In most cases, life insurance will usually only pay out in the event of death. So if you can’t provide for your family in the case of illness or disability, you probably won’t be covered.

However, some policies do provide a terminal illness benefit, which means that they will pay out on diagnosis of a terminal illness. Whether you’re covered or if your provider will pay out depends on the circumstances and the type of cover.

Many policies have some exclusions when it comes to what they’ll cover, for example as a result of drug or alcohol abuse. 

If you have a serious health condition when you take out the policy, your insurer may not cover any cause of death that is related to that illness. In this scenario, there are alternative products available, which cover:

  • Long term illness.
  • Critical illness.
  • Total and permanent disability.

Speak to an advisor to find out more about the various types of health insurance products, and which is most suitable for your needs.

How do different life insurance providers vary?

As with any type of insurance, what is covered in your policy will depend on the plan you opt for, and the provider itself.

Some insurers have exclusions when it comes to what they’ll cover, whereas others are less strict. Some won’t pay out for deaths relating to an existing health condition if you smoke, for example – there are many variables at play.

In a nutshell, higher risk applicants are likely to be more limited when it comes to choosing a provider, and as a result, the cost of a life insurance policy will probably be more costly.

To get the best policy for you, look for a provider that aligns their plan to your personal and financial circumstances.

Consider the following:

  • How much payout do you need?
  • Is term or whole-of-life more suitable?
  • The term: is level, decreasing or increasing cover most viable?
  • Do existing health conditions impact or invalidate a payout?
  • Will your lifestyle invalidate or impact a payout?

Once you’ve established exactly what you want covered by your life insurance policy, you can start searching for the most suitable providers.

You can carry out online comparisons, but many experts recommend that you seek independent financial advice – online calculators often lack the ability to factor in all your circumstances.

For help identifying the best life insurance provider for you, contact Online Money Advisor. The experts we work with will carry out an assessment so as to provide you with bespoke advice tailored to your exact needs.

Make an enquiry or give us a call for a free, no obligations chat on 0808 189 0463.

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