What does life insurance cover?
Life insurance is a way of helping your family cope financially when you die. It is intended to provide help to your loved ones when they can’t rely on your salary or income any longer.
The pay-out can be used to clear debts, pay off the mortgage or just cover everyday expenses. It could even pay for your funeral if you haven’t set anything aside for that.
Should I bother with life insurance?
If you are single with no one depending on your income, then you probably don’t need life insurance.
If on the other hand you have a partner or family who may struggle to cope financially, then life insurance could offer the help they need at a very difficult time.
Can I get life insurance through my employer?
Some employers might offer life insurance in what’s known as a ‘death-in-service benefit’. This, like regular life insurance, pays out a lump sum if you die while in employment, at a rate that’s usually four times your annual salary.
While it can be a valuable benefit, you might need to take out additional life cover depending on certain factors such as how much you owe on your mortgage, or any financial provisions for your dependants’ future.
What is term life insurance?
Term policies, the most common type of life insurance, only pay out if you die within the duration agreed in the policy. For example, if you take out a term life policy for 25 years, your family can claim if you die during this 25-year period.
However, if you die after this term then there would be no pay-out.
Does your life insurance pay out stay the same no matter when you die?
This depends on the life insurance policy you buy. If you buy level term insurance, the pay-out is the same whether you die in year one or in the 25th year.
Decreasing term insurance is a cheaper option, because the pay-out gradually becomes smaller over the years. This type of decreasing level policy is often linked to repayment mortgages because the amount you owe the lender also decreases over time.
Family income benefit is another option. It pays an income much like a monthly salary rather than a lump sum from the time of the claim until the end of the term you agreed with the insurer. Family income benefit is even cheaper than level or decreasing term life insurance because the amount paid out by the insurer is expected to be less overall.
How do I decide the length of the life insurance term?
You’ll need to consider exactly what you want it for. Maybe you want to make sure the policy lasts as long as your mortgage repayments. Perhaps you want to link it to your children’s age, so it won’t expire until they have finished school, turned 18 or finished university.
Of course, your own age will have an impact on your decision.
Can I buy life insurance that will pay out whenever I die?
Yes, it is called life assurance or whole-of-life insurance. Your family can claim for your policy no matter when you die, unrestricted by a policy term.
Life assurance is normally more expensive than term insurance, as the insurer knows for sure that it will have to pay out eventually.
Are life insurance premiums fixed?
Level and decreasing-term insurance, and family income benefit policies, usually have guaranteed fixed premiums throughout the policy term.
That said, check the small print as some firms offer ‘reviewable’ premiums, which can be reviewed every five to ten years and normally go up in price.
But whole-of-life assurance is slightly different because it is typically linked to a specific investment. So if the investment does not perform well, then the premium is likely to increase so the insurer doesn’t lose money.
How much life insurance do I need?
It all depends on your personal circumstances as the amount of cover, also known as the ‘sum insured’, can be different for each family.
Let’s say you are married, have a large mortgage and four children. In this case you are going to need more cover than a single parent living in a two-bedroom flat with one child.
Most of the time, the recommended level of life insurance is 10 times your annual salary or income. Obviously however you should make more detailed calculations to make sure you are fully covered.
How much does life insurance cost?
Your premium will vary depending on the type of policy, the size of the sum insured and also the risk of a claim – if you have a dangerous job, for example.
Also, age is a factor, so life insurance will be more expensive for an older person. Similarly, if a customer is in poor health, they can expect to pay a higher premium.
The insurer will take into account occupation, hobbies, lifestyle – such as whether you smoke, your weight and your fitness – to help determine their premiums.
Even postcodes are checked, as certain areas of the country are more likely to claim.
Can I still take out life insurance if I have a pre-existing condition?
In truth, it can be difficult to find affordable life insurance if you have a pre-existing medical condition, especially a serious one.
Some insurers will just turn you down outright, while others might exclude the condition itself. For example, if you had diabetes you might find yourself with a policy which wouldn’t pay out if you died from the disease.
You would be covered if your death was not related to your condition, or could be proven not to be.
Nevertheless, there are a number of specialists who offer life insurance to those with pre-existing conditions, but you must be prepared to pay higher premiums because of the high risk of a claim.
Can older people buy life insurance?
Yes, but life insurance premiums rise with age and older people will almost certainly pay more for cover.
It is still possible to take out life insurance when you are in your 50s, and some firms will accept you without medical or health questions.
Can I insure my partner?
Many couples take out joint life insurance, due to convenience and the fact it is normally cheaper.
It is worth noting that joint life insurance normally only pays out once, at the first death, and leaves the surviving partner without insurance.
When the survivor wishes to take out new insurance, the premiums are likely to be higher, because the person will be older and/or in a worse state of health.
Can the policy pay out a regular income rather than a lump sum?
If you opt for family income benefit, then yes, your beneficiaries will receive an income much like a salary after your death.
This is often easier to manage than a lump sum because you don’t need to worry about investing or management fees.
What’s more, premiums are typically cheaper because the longer you live, the less the insurer has to pay. If, for instance, you take a £30,000-a-year policy for 25 years and died in year 20, the insurer would only pay for five years.
Will my family have to pay tax on my life insurance?
Proceeds from a life insurance claim are free from income and capital gains tax, but they are counted as part of your estate and are therefore liable for inheritance tax (IHT).
It is easy to sidestep IHT by writing the policy in trust, so it is not taken as part of your estate when you die.
Can I make changes to my policy?
While you can usually make amendments to your life insurance policy, it might result in higher premiums.
You should also keep your insurer up to date with any changes in circumstance or you might invalidate the cover.
In fact, you should regularly review your policy to make any changes you might need, such as marriage, a new home or a new addition to the family.
Are there any common exclusions?
Always read the small print of any life insurance policy to understand the level of cover and the exclusions.
Most insurers will not pay out if you die as a result of alcohol abuse, suicide or a drug-related death.
It is also difficult to get cover for a pre-existing medical condition, or if you die as a result of a dangerous sport or hobby.
What is critical illness cover?
Critical illness cover is a common extra people add to their life insurance. It pays out a lump sum if you are diagnosed with a serious condition during the term of your policy. However, most policies only pay out once, so if you claim, your family would not be able to claim again on your death.
Also, the list of conditions is not exhaustive, so check the small print for what is listed.
Are there any other life insurance add-ons?
You can also add terminal illness cover – where you receive a pay-out upon being diagnosed with a terminal, life-ending illness or condition.
Another common add-on is waiver of premium, which helps pay the premium when you are unable to work due to illness or injury.
How do I cut the cost of life insurance?
It makes sense to buy life insurance as young as possible as older people pay more for their premiums, so do it in your 20s and 30s rather than your 50s.
Improving your health by losing weight and giving up smoking will also significantly reduce your premiums.
Another money-saving tip is to shop around. It’s easy with MoneySuperMarket’s free independent comparison service.
Premiums vary from insurer to insurer so you can often save money if you compare prices. We can help you get a great deal on your life insurance in a matter of minutes.