It’s so simple to get your life insurance sorted.

How does life insurance work?

Life insurance is a safety net that pays out a tax-free sum to your family, giving them financial support after you pass away. Whether a spouse or children depend on the money you earn, life insurance protects their financial support when you’re no longer around.

The cost of life insurance depends on several different things, including:

• Age: Older individuals pay higher premiums because they’re more at risk of developing certain illnesses.

• Health: You might have to pay more each month if you have a pre-existing health condition. However, this depends on the situation and its severity.

• Lifestyle: Your insurance provider might also have higher premiums for people who drink a lot of alcohol, smoke or are overweight.

• Occupation: If you work in a dangerous job like being a firefighter, you’ll pay more than someone in a relatively risk-free profession.

• Family Medical History: Certain conditions, like some types of cancer, can run in families, and your insurance provider will want to learn about them.

• Cover amount and length: Policies with higher cover amounts and longer terms always cost more than other policies because your family receives more financial protection.

It’s important to be honest about your medical status and family history, as the insurer might not release any payments if you miss out on any pre-existing conditions.

Luckily – as long as you’re honest – claiming on life insurance is simple. Your partner or family just need to contact the insurance company, so you must ensure your documents are kept in a safe place.

There are three types of term assurance, level, decreasing and increasing.

Level term assurance

Level-term life insurance means your beneficiaries will receive the same payment for the duration of your coverage. For example, if you take out cover for £150,000 and pass away within the cover period, your beneficiaries will receive that amount.

Decreasing term insurance

Decreasing life insurance is where the death benefit drops over time. People often choose this option when they need to cover specific financial obligations such as loan repayments or mortgages. The payment amount makes it easier for the next of kin to manage repayments.

Increasing term insurance

In contrast, increasing term insurance payments get larger as the policy continues. So, for example, if the individual dies when their policy has been active for a while, their beneficiaries will receive a larger death benefit. These policies can protect your loved ones against inflation and rising living costs.

Family income policies

Family Income Benefit differs from traditional policies because they don’t pay a lump sum. Instead, your family receives a regular income over a set period. For example, you could invest in a policy that lasts 20 years and pays a certain monthly amount.

The main reason for these policies is to provide income protection for your loved ones. They can use these payments to cover the mortgage and bills, giving them financial stability.

While this insurance type has many benefits, there’s no initial lump sum payout, and the duration only lasts for a set time.

Whole-of-life insurance policies

If you want to give your loved ones maximum protection, a whole-of-life policy doesn’t come with any fixed terms and pays out whenever you pass away. These policies are popular because they offer long-term protection and guarantee that your payments will eventually pass on to your beneficiaries.

As there are no fixed terms, the policies are more expensive than traditional term assurance, but a whole-of-life policy does offer more security.

There are two main types of whole-of-life insurance, balanced and maximum cover.

Balanced policies

Balanced cover allows people to pay the same amount throughout life, even when they become unwell or get older. Some premium payments increase as a person ages or in personal circumstances, but these policies offer long-term security.

Maximum cover

Maximum cover is a unique form of life insurance because your cover links with an investment fund. Your chosen insurer will invest your monthly payments to make enough money to cover the payout when you pass away.

However, the main problem with maximum cover is it depends on whether the investments are successful. Insurers might increase your monthly premiums or offer a lower payout to your beneficiaries, so these policies have less security.

Single vs Joint life insurance

One of the most significant decisions a couple will have to make is whether they opt for single or joint life cover. To decide which is best for you, it’s essential to understand what each policy offers:

• Coverage Level: While single life cover is for one person only, joint policies cover two people.

• Insurance Payouts: Single life insurance pays when an individual passes away, so if a couple each has a single life insurance policy, the beneficiaries will receive two payments. Joint policies pay out when one person dies and the surviving partner has no coverage.

• Costs: Single life insurance is more expensive than joint coverage because it covers individuals. However, joint life insurance is cheaper because the policy ends after the first person passes away.

There’s no right or wrong answer as to which policy is better, but some people prefer single coverage as it means they can file two separate life insurance claims when needed.

What can a life insurance lump sum be used for?

Life insurance can be used for several different things, including:

• Mortgage Payments: Including a repayment mortgage or interest-only mortgage.

• Living Costs: General expenses such as groceries, clothing, schooling, etc.

• Debt Repayments: Credit cards, personal loans, medical bills etc.

• Funeral Expenses: Life insurance can pay for your funeral, making it easier for your loved ones to arrange.

Coverage duration

The coverage duration will impact how much you pay each month, so consider what you need before deciding. For example, you might want the policy to last until your children achieve financial independence or the mortgage is paid off in full.

Budget

In an ideal world, we’d have policies that provide lifelong protection for our loved ones, but that’s not always possible. Your insurance should align with your budget, as failing to make payments could mean you have to decrease the coverage or lose the premiums you’ve already contributed.

Medical considerations

It might seem tempting to lie about pre-existing health conditions, but your family could lose out if your insurance provider feels you weren’t honest during your initial application. Be prepared to discuss your medical history and have an assessment if needed.

Get proper advice

Before choosing a policy, it’s a good idea to speak to a financial advisor, as they’ll be able to talk you through the premium structure and any extra payments you might be unaware of. A free consultation can also help you find the best life insurance provider.