What is life insurance?
Life insurance is an insurance policy designed to pay out a lump sum upon the event of your death, or in the case of some policies, at a set date in the future.
Sometimes called life assurance or term insurance, you have a number of available options when it comes to the type of policy you can take out, how much you are insured for and how the policy pays out when the time comes.
There are basically two types of life insurance product - term assurance and whole-of-life insurance.
Term assurance is a set of life insurance products that will pay out if you were to die during a fixed term - say 25 years. If you die after that period, there is no payout. For that reason, term assurance is usually sold alongside mortgage products - to make sure your family can pay off the mortgage if you were to die.
There are a number of different kinds of term assurance:
Level term assurance pays out the same lump sum at any time during the life of the policy. This kind of product is very often bought alongside an interest-only mortgage
Decreasing term assurance pays out a lump sum, which decreases by an agreed amount each year, ending up at zero at the end of the term. This kind of product is often bought alongside a repayment mortgage, since the mortgage debt will decreases each year
Increasing term assurance pays out a lump sum which increases by a small amount each year. This kind of product is a good way to guard against the effects of inflation over time
Convertible term assurance gives you the option to convert to a different kind of life insurance product at any time during the life of the policy
Family income benefit insurance policies offer your dependents a regular income from the time of your death until the end of the policy, rather than a lump sum
Whole-of-life insurance meanwhile lasts throughout your life, so your family is guaranteed a payout upon your death. Because you are certain to die at some point during the life of the policy, premiums tend to be higher for this kind of product.
In essence, all whole-of-life policies work in the same way, though they can be funded differently, for instance through regular monthly premiums or through investment products. Policies that you simply contribute a set amount to each month will have a fixed final payout, whilst those linked to investments will pay out according to their overall performance over the life of the policy.
When do I need life insurance?
If you are wondering if you need to take out a life insurance policy you should ask yourself; Do I have any dependants that rely on me financially?
If the answer is yes then a life insurance policy is a sensible and responsible precaution.
Certain events that may prompt you to consider getting a life insurance policy include:
Marriage or long term relationship
Getting a mortgage
You may decide that a life insurance policy is not necessary for you if you are:
Single with no kids or other dependants
Your partner's earnings are sufficient to provide for your family
If you are elderly and children no longer live with you
You have death in service cover
How do I go about choosing the right product?
What is right for you depends very much on your circumstances, for instance how many dependents you have, whether you have a mortgage (and what type it is), how much you can afford to contribute each month and how much you want the policy to pay out at the end. In general, it is worth considering the following issues before you buy:
The type of policy you want
Any charges you will have to pay to set up the policy
For investment-linked policies, what the risks and likely returns are
How flexible the policy is - for instance if you want to miss a payment, switch to a different product or cancel your policy
Terms and conditions, particularly anything that may make you ineligible for the policy
It is always a good idea to shop around before you settle on any one life insurance policy. So, get an idea of what you want, how much you can afford to pay and then get some quotes. Remember, it is important to look at the terms and conditions for any policy you're considering carefully before you commit. This will help to ensure that you get a value for money policy that pays out when your family need it too.
Shop around before you buy
Always check the terms and conditions
What happens when I have chosen a policy that suits me?
First of all, before you do anything, you should check that the company offering you insurance is registered with the Financial Conduct Authority. This will ensure that you are protected and can make use of the FCA complaints procedure if necessary.
Once you make a decision, you will need to go through a formal application process with the insurer. It is important to be honest about your circumstances, as this will affect your premiums and, more importantly, giving false information might lead to the insurance refusing to pay out when the time comes.
Be clear about your age, sex, whether you smoke, any pre-existing medical conditions you may have, and your medical history. Some insurers will require that you undertake a medical examination before taking to a policy, but this is becoming less common.
Check the FCA register before you buy
Be honest about your circumstances
Be ready to take a medical if needs be
Don't assume - if any aspect of the policy (especially exclusions) is not clear, ask the insurer to clarify before buying
How can I find cheap life insurance?
First of all, make sure you take the time to shop around and compare a number of different policies and quotes before you commit.
If affordability is a particular issue it's worth bearing in mind that term assurance tends to be a cheaper alternative to whole-of-life cover, although the cover will only last for a set period.
Finally, the best way to get cheaper life insurance is to stop smoking. Often smokers pay almost twice the premiums that non-smokers do, principally because of the related health risks.