Life Insurance Guide

Life insurance could prove to be the most important financial product you ever buy.

If you die while you still have dependents, being able to claim on a life insurance policy could mean the difference between your loved ones struggling to make ends meet, and their being financially secure.

Despite this, many of us simply don’t have any life insurance cover in place – which is sometimes hard to fathom when you think of how vulnerable we all are to accidents and serious ill-health but it’s also not hard to see why so many of us put it off. After all, most of us have enough money worries in our everyday lives without also having to think about what will happen in the event of our death.

And who wants to think about death anyway!

However, if you don’t consider what your dependants would do without your income, you could end up leaving them high and dry financially at what is already likely to be a very stressful and emotional time.

Even if you don’t work – you might be a stay-at-home parent, for example – the cover could still prove invaluable, as the chances are childcare and other housekeeping costs would need to be paid for if you were no longer around.

There are several different kinds of life insurance policy to choose from, so it’s important to understand exactly what’s available before buying. Here we explain how the various kinds of plan work, so you can decide which policy might be right for you.

Term insurance

‘Term’ insurance pays out when the policyholder dies within a set period of time. Most policies run for between 10 or 25 years, but you specify how long you want the term to be.

If you die during the term, the policy will pay out the amount agreed at the start, which is known as the ‘sum assured.’ Some policies will also pay out if you are diagnosed with a terminal illness.

If you die within a relatively short time of taking out cover, the policy might not pay out, so always read the small print carefully before buying.

If you live beyond the term of the policy, the cover simply terminates – there is no investment element or any return of premiums.

Family Income Benefit

Standard term insurance pays out a lump sum – all very welcome in a time of financial crisis. But it also brings with it decisions about how the money should be managed once immediate debts and other obligations have been settled.

Some families especially might prefer a regular income after the death of the breadwinner, in which case a family income benefit policy could be worth considering. This sort of policy will provide a monthly tax-free income which will be paid until the end of the agreed policy term.

You can even opt to have the payment increase over the term to mimic would-be pay rises and increases in the cost of living.

The biggest disadvantage of this type of cover is that, once the policy term finishes, the income will stop. For example, if you take out a 25-year policy, but die two years before this policy expires, your dependents will only receive an income for the final two years.

Whole of life cover

If you don’t want to take out life insurance for a set term, but want it to last a lifetime, one option is to take out whole of life assurance (Insurers tend to use the word ‘insurance’ as there is a risk that something might happen within a given time frame, and use ‘assurance’ when something is certain to happen).

This type of policy doesn’t have an end date, so you keep on paying premiums until you die at which point the policy will pay out (some policies require premiums to be paid only until you achieve an advanced age – perhaps 85).  As a pay-out is certain, this type of cover is much more expensive than term insurance.

The way this cover works is more complicated too, as some of your premiums will go into investment funds and some towards buying life cover. This means that the amount your dependants will receive when you die will be vary depending on how the underlying investment has performed.  Because of the way it is designed, whole of life insurance is not intended to provide for the unexpected and premature loss of an individual. It is often used for complex financial and tax planning needs.

Some term insurance policies can be converted to whole of life policies, known as convertible term insurance. Premiums for this type of policy are higher than for conventional term insurance policies, and once the policy converts, they are likely to increase.