LIFE INSURANCE: The Basics
What is Life Insurance?
Life insurance is a policy that can give your family or dependants financial security after you die. For this reason, it is often called the most essential financial product you can purchase.
Many of us delay getting life insurance but it can take a substantial amount of pressure off of our family’s shoulders in the future when it comes to paying the bills, debts or daily expenses.
There are many different types of life insurance and it is worth spending a bit of time working out which one is right for you. This guide breaks down that to know about life insurance.
What are Premiums?
The premium is the amount of money you pay into your policy on a regular basis. Life insurance premiums will differ from policy to policy. They can also differ from person to person in life insurance as the amount of money you pay is often determined by your age, lifestyle, and medical history.
Why should I get Life Insurance?
Taking steps now could save your family or dependants financial difficulty in the future, even if you think your death is something you won’t have to worry about for many years yet. The earlier you get life insurance the less expensive the premiums will be and the more options you will have when it comes to policies.
If you do not have any dependents or people you want to look after financially when you die, you might still want to look at policies like critical illness insurance which can pay money out to you personally if you become critically ill later on in life.
Age and Illness
How do I take out Life Insurance if I already have a serious medical condition?
You will find it harder to take out affordable life insurance if you already have a serious medical condition. This is because you will now be seen as a higher risk than a person who has no pre-existing condition.
This doesn’t mean you definitely won’t be able to get life insurance but you might have to prepare yourself to pay more expensive premiums. Your life insurance company will also want to go through your medical history and lifestyle before they make a decision.
Another possibility is that they will just exclude the particular condition from your policy. For example, if you have a heart condition the policy could state that your dependants will not get a pay-out if you die from that particular condition.
You will not be the only person who has applied for life insurance with a previous health problem so don’t worry about not being able to find any policy that is right for you. Just be aware that it may be more expensive and that it is important to be entirely truthful with your insurer. If they find out otherwise, later on, your application will be rejected.
Can I get Life Insurance if I’m older?
It is recommended you get life insurance early on in life as the older you get, the more the premiums will increase. However, this doesn’t mean that you can’t get life insurance later on in life and, in fact, many people do.
There are even policies aimed at people in their 50s or over that will accept you without health checks or questions on medical history. This is called over 50s life insurance.
Should I make changes to my Life Insurance policy?
It is recommended that you regularly review your life insurance over the years. Over time your circumstances and needs will change; you might get married, buy a new home or have a child. What you want out of your life insurance will change alongside this.
Keep your insurer updated with any major changes in your life but be aware that the amendments might result in higher premiums.
What illnesses or conditions are not covered by Life Insurance?
This differs from policy to policy but there are some elements that feature across the board. Most policies will not pay out for deaths related to substance abuse (drugs or alcohol) or suicide.
If you work in a high-risk job; for example, in the armed forces or oil industry workers, then this also may affect your application. Other factors that might cause a rejected application include a dangerous sport, like motorbike racing or mountaineering.
Types of Life Insurance
What is Term Life Insurance?
If you want life insurance for just a specific period of time, then term insurance is the best type for you. This is the most common type of life insurance. The cover lasts for only within the term, 30 years for example. If you die after the policy ends then the pay-out will be nothing.
How long should I get Term Insurance?
Term insurance is popular for people who want to focus on paying off a mortgage, paying off a debt or waiting for their children to come of age. The length will depend on why exactly you are choosing to take life insurance out.
It is also important to think about what you can afford. If you stop paying your premiums at any point within the term, the insurance will come to an end and your beneficiaries will receive nothing from it even if you pass away.
Will the pay-out be the same whether I die at the beginning or end of the term?
There are three main types of pay-out for term insurance and the amount of money your dependants receive will depend on which policy you buy. The three types are:
– Decreasing term life insurance –This is the most affordable option as the pay-out will decrease as the term advances. This type of policy is popular with people who want a pay-out that will sync with repayments of their mortgage or debt, for example.
– Increasing term life insurance –This is the most expensive option. The pay-out will increase as the term advances. People who want the pay-out to match the rising cost of living or inflation will often pick this option.
– Level term life insurance –This policy will pay out the same amount whether you die at the beginning or end of the term. You might want this option if you want your family to have the security of knowing exactly what they will get.
What if I want my Life Insurance to cover me until I die?
This is one of the most common life insurance questions. If you want your life insurance to pay out no matter when you die, then you can opt for whole-of-life insurance. This is more expensive than term insurance as a pay-out is more or less guaranteed. However, this means your family will definitely be provided for when you die.
Can I take out Joint Life Insurance with my partner?
Yes, joint life insurance is sometimes taken out by couples. Like with regular life insurance, the pay-out will go out as a lump sum.
However, it is important to note that most joint life insurance pays out only once. This means when one half of the partnership dies, the other person will get a pay-out and then be no longer covered. They will also be older than they were when they first applied for life insurance and may find it harder to get covered again.
Does the policy have to pay out the money all at once?
Not always – if you take out family income benefit then your dependents will receive the pay-out in a regular monthly income. This will come to them from the date of the claim to the end of the term. People choose this option if they don’t want their family to worry about how they spend the money all in one go.
The premiums are usually cheaper than other types of life insurance and this means the pay-out is also not as much as you might get with regular life insurance.
Can I get Life Insurance at work?
Yes, there are some employers who offer life insurance and this is called death in service benefit. If you die while you are working for the company, you will get a lump sum just as with regular life insurance.
This can be very useful but you might want to take out additional life insurance. A common reason for this is you might not be certain that you will be working at the same company along the line. Another important factor to consider is that the pay-out from the cover might not be enough to cover your individual concerns, such as; your mortgage, any other debt, and the daily living expenses of your dependants.
How much does life insurance cost?
There is no average cost for life insurance. What might be the ideal pay-out for you, will not be for someone else. The premiums you pay will also depend on which policy you get and factors like; your age, lifestyle, occupation, and medical history.
Everything from your postcode to your hobbies will also play a part in how much you can expect to pay into the policy. For example, if you play dangerous sports like mountaineering or motorbike racing then it is more likely your premiums will be more expensive than a person who paints flowers or plays golf as their hobby.
How much Life Insurance cover should I get?
This will be different for each person and it depends on your own personal circumstances. It is often recommended to aim for ten times of your annual salary, so this is a good place to start and you can add up the extra costs on top of that.
For example, do you have children, and are they too young to make a living themselves? Then you might require a bigger pay-out than a person with no children or who has children who are already making a good salary. Other factors to think about are your mortgage and the daily living expenses of your household.
How do I bring the cost of Life Insurance down?
There are several things you can do to bring the cost of your life insurance down.
Firstly, the sooner you buy life insurance then the less expensive it will be across the board. So it is best to start looking as soon as possible, even if you think you won’t need to worry about what will happen to your loved ones after your death for a while yet.
Another thing you can do is make healthier lifestyle choices at least 12 months before you buy life insurance. For example, if you quit smoking for about a year beforehand then your premiums will be less than that of a smoker.
You can also opt for a more affordable type of life insurance like family income benefit or decreasing term life insurance if you would like to go for budget-friendly life insurance.
Will my Premiums stay the same?
This depends on the policy. Some types of life insurance, such as; family income benefit, level term insurance and decreasing term insurance, will have guaranteed fixed premiums. However, you should always make sure this is the case before you buy.
It is worth checking if your policy is a reviewable plan. This means the premiums will be fixed for a set period and then be up for review once the period ends.
What happens if I stop paying my Premiums?
If you stop paying your premiums, your cover will come to an end. If you die after this then your family or dependants will not receive anything and you will not get anything back from the money you paid in previously. This is why it is important to make sure you can pay your premiums before you commit to your life insurance and pick the one that is affordable for you.
What is Critical Illness Cover?
Regular life insurance will pay out money to your loved ones when you die but there is an extra you can opt for called critical illness cover. This will pay out money to you personally if you are diagnosed with a serious illness or disability during the time you are covered.
This can be useful if you are dependent on your salary to live and can alleviate the financial burden during a stressful time. Make sure to check the list of conditions your policy covers before you buy and how many times the policy will payout. Some policies only pay out once so if you get a lump sum when you are critically ill, your dependents will not get anything when you die.
What is the difference between Critical and Terminal Illness Cover?
They are sometimes confused with each other but there is a big difference between the two.
Critical illness cover is an optional extra which will pay out a lump sum to you if you are diagnosed with a critical illness. In insurance terms, critical illness refers to a condition that you might potentially recover from or can continue to live with.
Terminal illness cover is often included in basic life insurance policies and refers to an illness where you are diagnosed to pass away within 12 months. The money will be paid out to you to spend as you wish.
What other extras can I add to my Life Insurance?
Terminal illness cover is often included in basic life insurance but if it isn’t you can add it as an extra.
We discussed before the dangers of not paying your premiums. There is a step you can take at the start of your policy called waiver of premium which can help pay your premium if you are incapacitated by an illness or injury that prevents you from working.
Will my Life Insurance pay-out be taxed?
In general, the money that is paid out from a life insurance policy is not counted as taxable income.
There are a few exceptions to this. The pay-out will be counted as part of your estate and so can be liable for inheritance tax (IHT). However, you can easily avoid this by writing your policy in trust. This means you avoid the tax and your dependents will receive the pay-out faster.