Talking about death, or even just thinking about dying, is uncomfortable for many of us. However, taking a life insurance policy means that you can at least financially secure your near and dear ones in case you die unexpectedly and prematurely.
The most common type of life insurance is designed to pay out a tax-free amount to your loved ones if you die within a certain period, known as a ‘term’. That’s why you’ll sometimes hear it called ‘term insurance’.
The money paid is known as the ‘Sum Assured’. This is the amount that you decide to buy at the time of taking out your policy.
If you survive the full term of the term, your policy terminates – it has no value at this point. Similarly, if you stop paying the premium, the policy lapses.
The other main form of life insurance is ‘whole life’ insurance, which pays out on your death. For this reason, it is more expensive – and it is more of an investment and tax-planning mechanism than a means of providing money for your loved ones after your sudden demise.
If you have people who are financially dependent on you, such as a partner, children (or both), at least taking out life insurance means that they will be provided in the event of your premature death.
You don’t have to be a breadwinner. If you take care of home and family while your partner is working, think about the impact it would have if you weren’t around. Money from life insurance payments will be very useful in paying for the support you need to cover your absence.
However, if you are single, have no dependents, and have savings to support your loved ones, the case for taking out life insurance is less clear.
Beneficiaries can spend the proceeds from the life insurance policy as they wish. But generally, the money can be used to pay off a mortgage, pay off debts owed or racked up on credit cards, or pay bills or other ongoing future expenses.
Should they choose, a person is allowed to take out several different life insurance policies at the same time.
Who provides life insurance?
Life cover is available from comparison sites, banks, building societies, insurance companies and brokers, and some retailers.
The policyholder usually pays monthly premiums to get the required financial protection.
There are several types of life insurance to choose from, depending on your individual circumstances and financial planning needs.
For example, ‘term’ insurance is a type of life policy that provides cover for a specified period(s). Such plans generally last between five and 25 years.
The longer the tenure, the higher your premiums are likely to be. This is because the probability of death increases with age, which increases the likelihood that the policy will be claimed.
Term insurance may be suitable for those who want to be sure that a large loan, such as a mortgage, will be covered after their death. Or it can provide financial security to a family until the children grow up and become financially independent.
There are three versions of term life insurance, each with a special feature…
In the case of ‘Level’ In term insurance, the payout remains the same even if the claim is made during the term of the policy. The beneficiary will know exactly how much they will be entitled to at any given time. The premium on the policy also remains the same for the term.
With term insurance ‘reducing’, the pay out gets reduced during the term of the policy. It makes sense that the main debt to be paid is a home loan, such as a repayment mortgage, as this, too, depreciates over time.
Premiums on declining term insurance will remain the same over the life of the policy, but they should be cheaper overall when compared to a comparable level of term cover.
In contrast, ‘growing’ term insurance is a type of policy where the payout increases over time. The thinking behind this is to protect the value of your policy against inflation. The amount of cover can be set to increase with an inflation measurement such as the retail price index, or a fixed amount each year.
Policyholders pay for this benefit through increased premiums over time, making it the most expensive of the three forms of term cover.
A couple can decide to buy two separate term insurance policies to protect each other as well as their children.
Another option is for them to buy a ‘Joint Life’ policy which may be cheaper in terms of the cost of the overall premium, but only because it pays on the first death.
With a joint policy, if the survivor wants to take a new life policy, it will be more cost-effective for them to do so. This is because they will be larger than the time the original plan was taken out.
How long should the tenure be?
While choosing the duration of the term on a life insurance policy, the key facts revolve around the purpose for which you might need the cover. If the objective is to pay off the mortgage, the term needs to last as long as the time left on the home loan in question.
Conversely, you may decide that you only need cover for a time when your children, or other loved ones, will be financially dependent on you. Alternatively, you may be on the lookout for cover ups till the time of your retirement.
What is the cost of term life insurance?
The premium charged by life insurers depends on several factors for the potential policyholder. This includes:
- Health (with immediate blood relatives)
- smoker / non-smoker
- Policy Term
- Quantity of cover chosen
The older you are, the more expensive your premiums will be. The same applies if you have health problems or if you are a heavy smoker. When taking out life insurance, you may be asked to fill out a medical questionnaire or undergo a health check-up.
From the point of view of the insurer, each of these variables reduces the likelihood of a claim being made by the policyholder. With that in mind, and assuming you need it, it can pay to take out insurance when you’re young.
The older you are when you take life insurance, the more likely you are to have health issues and the more expensive your cover will be. If your term insurance has expired and you want to take a new policy, your premiums will probably cost a lot.
Therefore, some insurers offer so-called ‘renewable’ term policies that allow you to renew your cover without having to have an updated health checkup. For example, it will allow you to take a term policy of 15 years and renew your cover at the same level at the end of the term.
life insurance options
Those who are looking for a different means to support their loved ones financially can also consider taking the family income benefit. Instead of providing a lump sum cash amount on death, it pays monthly tax-free income to your family if you die within the policy term.
If the cost of life insurance is a concern, the Family Income Benefit may be a more affordable option. It can also be easier to deal with a regular income than trying to manage a lump sum.