Put simply, life insurance pays out a lump sum or regular income if you die during the policy term.
2. Why do I need life insurance if it pays out when I’m dead?
The payout goes to your dependants and can help them cope financially after your death. So, if anyone relies on your income, such as a spouse or children, you should think about arranging life insurance.
3. Can the beneficiaries spend the money how they wish?
Yes, though most people use the payout to clear debts and cover day-to-day living expenses.
4. Are there different types of life insurance?
Life insurance policies fall into two broad categories: term assurance and whole of life cover.
Term assurance pays out if you die during the policy term. For example, if you took out a 15-year policy and died after 10 years, your dependants would be able to claim. However, if you died after 17 years, they would get nothing.
Whole of life insurance pays out whenever you die, whether you live for a further 15 or 50 years. Your dependants are therefore guaranteed a payout.
5. Is there a price difference?
Whole of life insurance usually costs more than term assurance because the insurer will inevitably have to pay out.
6. How much does life insurance cost?
Insurers take into account a number of factors when setting premiums, including your age, state of health, family medical history and occupation. To put it bluntly, the more likely you are to die, the higher the premium.
That means if you’re young, you’ll typically pay less for your cover – this could be as little as £5 a month.
The amount of cover, known as the sum assured, also has a big impact on the price. So, a policy with a sum assured of £500,000 will cost more than a similar policy with a sum assured of £250,000.
7. How much cover do I need?
Many advisers recommend a sum equivalent to 10 times your annual income, but it really depends on your circumstances, such as the size of your mortgage, your partner’s income and whether you have children.
Let’s say you are about to move in with your partner and have taken out a small mortgage. You have no children but you earn more than your partner and they would struggle to pay the mortgage without your income. You could therefore arrange life insurance to clear the mortgage debt on your death. Your partner could then meet any other financial commitments from their own salary.
You might need more cover if your partner stays at home to look after your newborn baby. As your partner does not earn an income, you would probably want to make sure you had enough insurance in place to cover the mortgage as well as other household bills including childcare.
It’s a good idea to review your policy on a regular basis – particularly if you have another child or move to a bigger home.
8. Doesn’t my employer offer life insurance?
Many employers offer something called death-in-service benefit. The terms vary, but it typically pays out a sum equivalent to four times your annual salary if you die while you are employed by the company.
You should certainly take any death-in-service benefit into account when assessing your life insurance needs, but you might need to buy additional cover.
9. How long should the cover last?
Some people want the policy to last as long as their mortgage. Others arrange cover according to the ages of their children. For example, they might want to have life insurance in place until their children reach 18 or finish full-time education.
Your own age will also affect the policy term. If you are in your 20s, you will probably opt for a longer term than someone in their 50s.
10. Does the payout remain the same throughout the policy term?
If you buy what’s known as level term assurance for say, a 20-year term, the payout is the same whether you die in year one or year 19.
But you can opt instead for decreasing term assurance. The payout will then gradually get smaller. People usually buy decreasing term assurance alongside a repayment mortgage because the debt also gets smaller over the mortgage term.
11. Are premiums fixed?
Term assurance premiums are usually fixed, or guaranteed. But some policies come with reviewable premiums, which are reviewed every five or 10 years – and they don’t usually go down.
Whole of life cover is different because the premiums are invested. If the investment does not perform as well as expected, the insurer can increase the premiums.
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