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Life insurance: Your burning questions answered

Posted in: Finance Last updated: 01 Apr 2014

Getting our heads around what life insurance is can be difficult – partly because it forces us to think about the inevitable and partly because there’s a minefield of different types to choose from. If you’re thinking about taking out life insurance, it’s important that you understand the product fully before taking the plunge. We’ve compiled the answers to some of your most burning questions.

What is life insurance?

Life insurance works by providing a one-off lump sum payment to your family when you die. Many people take out life insurance to help their family to cope financially when they’re no longer around. There’s something quite reassuring about knowing that, if the worst were to happen, your family would be financially protected.

How does life insurance work?

Generally life insurance works by paying a monthly premium into an insurance plan. The premium can vary and is usually dependent on your age and the amount of cover you need. In the event of death, a sum is paid out to whoever you’ve named on your will – providing you have one.

Why might someone need life cover?

Life insurance can contribute towards a whole host of expenses in the event of a person’s death. Certain changes in someone’s life might trigger them to think about getting covered. It might be that they consider it when:

• Having children or getting married – Financial protection becomes a bigger concern when getting married or starting a family. If either partner were to die, the surviving partner may have to change their circumstances. For example, they might have to stop working to free up time to look after the children. It’s in a scenario like this that a life insurance payout could act as a useful cash-cushion to fall back on, as the money could be used to cover living costs or mortgage payments.

On the other hand, a partner who has never worked before may have no other alternative but to take the jump into employment. In this situation, life insurance could be used to help fund childcare costs. You can see why it’s important for both partners to get covered in case the worst did happen.

• Planning funeral costs – Some people choose to take out insurance to contribute towards their funeral costs. Putting set plans in place can help to alleviate the worry of family and friends being left to cover the costs at a sensitive time.

• Taking out a big loan – Sorting out protection for financial liabilities such as a mortgage or car loan is a main concern for a lot of people. Life insurance can save your family from having to pay back costly debts out of their own back pocket.

What are the main types of life insurance out there?

There all kinds of life insurance available in the marketplace. We’ve whittled down the main types you’re most likely to come across:

Term Insurance – This covers you for a specific period such as 15 or 20 years. If you die within the fixed term, the sum assured is paid out, but this does mean that you’ll get nothing if you live for longer.

There are lots of different types of term insurance:

  • Level Term – In a nutshell, this is the amount you pay and level of life insurance cover stays the same throughout the term.
  • Decreasing Term – This basically means that the cover and amount you pay reduces over time. This type of life insurance is often taken out to cover a debt that decreases over time, such as a repayment mortgage. This is based on the idea that if you were to die during the term, the outstanding loan could be paid off.
  • Family Income Benefit – Family income benefit pays a monthly income if the insured person dies during the term of the policy – rather than a lump sum.
  • Increasing Term – The life cover and premium you pay rises over the years.

Whole of life insurance – This is designed to last as long as you do. So this means that so long as the premiums are paid, you’ll be covered up until the day you die. This is different to term assurance which only pays out if you die within a fixed term period. Because death is inevitable and a pay-out is guaranteed, you’ll probably find that whole of life cover is more costly than term cover. Whole of life insurance is often to referred to as over 50s life cover.

How much cover would I require?

It’s completely up to you – you decide the amount of cover you need based on your circumstances. For example, you might choose a higher amount if you have a number of relatives that are financially dependent on you or if you have a big debt to pay off such as an outstanding mortgage.

What isn’t covered by life insurance?

No two policies are exactly the same - all life insurance policies differ in some way or another. However, most policies will include some exclusions. So for example, if you’re an adrenaline junkie who loves sky diving or snowboarding, your premiums are likely to be higher due to the associated risks of extreme sports. The same applies for people who have high-risk occupations such as scaffolders, pilots and oil workers.

It’s really important that you do your homework on life insurance before making any brash decisions. If you feel that you need more lessons on life cover, you might find our article on common life insurance mistakes useful.

Note: Whilst we take care to ensure Hub content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions. OneFamily do not provide advice so it may be worth speaking to an independent financial advisor about your own circumstances.