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Take care of those who depend on you financially.

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Woman and child at home.

What is life insurance?

Life insurance is a type of insurance that usually pays your dependants money if you die during the term of a policy. It can allow your partner or children to continue to meet the future costs of living, or pay off debts like a mortgage. It can bring you peace of mind that your family will be taken care of financially if you’re no longer around.

Life insurance is typically paid out as a tax-free lump sum or in monthly payments, depending on how the policy is set up.

Do I need life insurance?

Whether or not you get life insurance could turn out to be one of the most important decisions you make in your life. Consider the financial strain that your family would suffer if you were suddenly no longer around to provide an income. And ask yourself:

  • Am I sure my dependants would be financially stable on their own in making certain payments, such as the mortgage or bills?
  • Would my children be able to go to college without a lump sum being paid to meet their future education needs?
  • Would my partner be financially stable enough to care for our children and stay in work/pay for a childminder?
  • Am I sure any death benefit I’d get from work would be enough to maintain my family’s standard of living for many years?
  • Would my family be able to pay others to do some of the tasks I do routinely, such as caring for an aging relative?
  • Would I want my family to pay for my last expenses, which may include taxes and burial costs?

if you answered ‘no’ to any of these questions, you could find that life insurance offers your loved ones the support they need.

When should I get cover?

For many people, the moment that others become financially dependent on them is the trigger for taking out life cover. Significant life events that may lead a person to take out life insurance include:

  • Taking out a mortgage
  • Buying a new home
  • Birth of a child
  • Any time a family member depends on you to pay for their care

Life insurance tends to be more expensive as you get older, as you’re seen as more of a risk to an insurance provider. So, there’s no time like the present to shop around for a competitive premium that will meet the future needs of your family.

What are the main types of life insurance?

The core types of life insurance are:

  • Term insurance. This is the most common form of life insurance. It can be split into two types: level term and decreasing term. Level term offers a fixed amount of money, for a fixed period of time, that you’ve pre-chosen. Decreasing term also fixes the period of time (or, term) of a policy; however, the amount which is paid out decreases over time.
  • Whole-of-life cover. This type of insurance offers you protection for your entire life. This means your insurer will pay-out after your death whenever it occurs. This type of life insurance is typically more expensive than term insurance, because the insurer knows it’s going to have to pay out when you die.

There are a number of other types of life insurance that you may want to consider. These include:

  • Joint life policies. This is a shared policy between spouses or partners. It could potentially save you money, given that you would only pay one premium to cover two people. However, when the first policyholder dies, the lump sum will be paid out and the other policyholder will no longer be insured.
  • Critical Illness cover. If you’re diagnosed with a critical illness or injury that’s listed in your policy document, this policy add-on would let you claim a lump-sum payment that’s tax free. However, most insurance providers will usually only pay out once, so, if you receive a payout for critical illness, then your dependants would not receive another lump sum after your death.
  • Terminal illness benefit. If you’re diagnosed as terminally ill and are expected to pass away within 12 months, then this benefit entitles you to make a claim for your life insurance in advance. Terminal illness cover is often included within many life insurance policies. Some providers will pay out a life insurance policy early if you’re diagnosed with a terminal illness.

More about term life insurance

Under term insurance, your insurance company will pay a lump sum to your dependants if you die while the policy’s active. But if you don’t pass away during the policy, then it lapses and you will no longer be covered, nor will you receive any payment.

  • Level term. This is a standard term policy. Your policy will stay the same throughout its term, meaning that it won’t change with inflation and your premiums will stay the same. This type of policy tends to be a popular choice for those with a mortgage, and many people will take out life insurance to cover with the whole term of their mortgage, which is usually 25 years. It means that in the event of your death, your loved ones won’t struggle to meet mortgage repayments or be forced to move. It is likely that your mortgage provider will offer you a similar form of cover (often known as mortgage protection insurance) when you sign up to a mortgage. However, you are not obliged to take the plan they offer.
  • Decreasing term. With this policy, your cover will gradually decrease over time, as will your premiums. This policy is a popular choice if you only want life insurance to cover a mortgage or debt that gradually reduces over time. Family income benefit is a type of decreasing term insurance that offers an income rather than a lump sum pay-out. If you die within a fixed period, your dependants would receive a tax-free income payment for the remainder of the policy term. For example, if you had this policy for 25 years and passed away after 20 years, your dependants would be paid an annual income for five years.

More about whole of life cover

There are different types of whole-of-life insurance policies, including:

  • Flexible whole of life. With this policy, part of your premium will be put into an investment fund. This means that the amount of money you receive will depend partly on how well your investment has performed. Your cover is usually reviewed every ten years, during which you can choose whether to increase or reduce your premiums and cover.
  • Non-profit whole of life. With this type of insurance, you’ll only be required to pay fixed premiums and there is no investment side to the policy. Your lump-sum payment is also fixed.
  • Over 50s life insurance. This policy is usually taken out between the ages of 50 and 80 – it’s often paid out as a lump sum and can be used to help your family with financial commitments when you pass away, such as funeral costs, outstanding debts or even as a cash gift. You can also buy funeral plans which can take care of the planning for, and payment of, your funeral.
  • In Trust. This is essentially a legal arrangement that keeps a life insurance pay-out separate from the valuation of your estate after you die. It doesn’t usually cost you anything extra to put a policy In Trust – your insurance provider will often help you set it up, and pay-outs can be quicker. This type of policy is often used to mitigate inheritance tax.

MUST READ: Review your policy regularly

Once you have cover in place, you should review your policy regularly to ensure you still have the right level of cover. Events that can affect your policy include:

  • Changes in your health
  • Marriage or divorce
  • Buying a new home
  • Children moving out, or becoming financially independent
  • Retirement

Most experts recommend that you review your life insurance policy every 12 months.

What features or optional add-ons should I look out for?

Before you purchase life insurance, it’s worth considering what additional features you would like to add to your policy. If you become seriously ill or disabled and are unable to work, having a premium waiver means you can avoid some of your regular premium payments. If you’d like the chance to amend your policy, for example, transferring it from a fixed-term policy to a whole-of-life policy, then you should look out for a deal with a convertible term. Elsewhere a Renewable term policy gives you the option of renewing your policy without the need for a health review. Some insurers let you combine policies, sometimes offering multi-policy discounts if you take out cover for your spouse or child, or if you take out other types of personal insurance with their company. Be aware that adding such extras on to your policy will lead to an increase in your premiums.

How can I save on my policy?

There are a few ways that you could save on your life insurance policy, including:

  • Be healthier. Pre-existing medical conditions, smoking, excessive alcohol consumption and obesity can all drive up your premiums; smokers usually pay double compared to non-smokers. If you can show you are taking steps to improving your lifestyle then you could be rewarded with lower premiums.
  • Avoid getting too much cover. Consider your financial obligations and how long you are likely to need cover to work out the right amount of insurance. You may find that a cheaper policy with less features is still sufficient for your situation.
  • Review your cover each year. Assess what is already in place and see if you need to upgrade your insurance.
  • Compare, compare, compare. There are many insurance providers in the life insurance market, so comparing a lot of options is a great way you could find savings on your policy.

The overall cost of your policy will vary based on a range of factors. This includes the type of policy your choose and your cover level. Other factors that affect the price of a policy include your age, health, occupation and income. Keep in mind that price isn’t the only factor when it comes to life insurance. Getting the right cover in place is key, and therefore it’s a good idea to reach out to a financial expert if you need extra help understanding this area of insurance.

What are some of the key policy exclusions?

Insurance providers have specific guidelines for when they will and won’t pay out. Make sure you read and fully understand a life insurance policy document before you sign up with a provider. Policies typically won’t pay out in the event of death caused by intoxication by drugs or alcohol, gross negligence or suicide.

It’s important that you’re accurate and completely honest when you are completing an application for life insurance. An insurer will ask you to disclose personal details about yourself, including your medical history and your lifestyle. If you smoke, say so. And give the correct details of how much alcohol you consume. By not doing so, you could end up invalidating your policy meaning your family won’t get a pay-out.

What else should I be aware of?

When you’re considering life insurance cover, you should take into account:

  • Any future costs. Think about your current bills and expenses, and take into account what these will look like in the future. For example, if you have young children, the cost of school and university is likely to be significant in future years, so make sure you allow for this when assessing what you can afford.
  • Cover for the stay-at-home parent. Life insurance for a stay-at-home parent is also important. Consider points such as how much your family would have to spend on childcare if the parent became ill, was injured or died.
  • Qualification period. Insurers will set a period of time, called a qualification period (or moratorium), which is activated as soon as you buy a policy. You’ll have to survive this qualification period in order for the full agreed amount to be paid to your family (it’s often between one to two years).

Frequently asked questions

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