Learn how life insurance works
From the cost to who gets the money if you die within the life of the policy, here's a simple life insurance guide.
You may have been told you should have life insurance, but do you know how it works? You may know the basics - it's insurance in the event you die - but there is more to it. What happens if you die from something risky, such as bungee jumping? Will your ex still get compensation if she remarries? The point is, there are a lot of questions to ask, whether you're considering buying your first policy or if you've had one for years.
What is life insurance?
Life insurance is a cover that pays a lump sum if you, the policyholder, die during the life of the policy - or if you have been diagnosed with a terminal illness and are not expected to live more than 12 months. It is there to provide some financial support for your loved ones after your departure, whether that means helping to pay off their mortgage or maintaining their standard of living.
There are three different types of term life insurance: Level Cover, Increased Cover, and Decreased Cover. These affect how your coverage amount changes over the life of the policy, and thus how much coverage will cost and are designed for people with different financial needs. For example, if you are interested in paying off a mortgage if you die within the life of the policy, you may choose to reduce coverage: this type of life insurance policy depreciates over the term, but the premiums remain the same. Himself. This is because mortgages generally decline over time as well. That's why this type of life insurance is sometimes known as mortgage protection insurance.
New in cover life? Our life insurance glossary helps explain some basic terms.
How much does life insurance cost?
In addition to the type of policy you choose, several factors can affect the cost of your premiums. The price an individual pays usually depends on factors that include:
- Age - Generally speaking, the older you get, the more expensive the policy. This is because with age the risk of developing a medical condition that may affect life expectancy increases
- Lifestyle - Following an unhealthy lifestyle can lead to higher premiums. For example, drinking a lot of alcohol or being overweight can shorten your life expectancy. Premiums are usually higher to reflect this
- Health - Having a pre-existing medical condition can affect the price you pay. Some of the more serious chronic medical conditions mean the premiums will usually be higher
- Family medical history - Insurance companies may ask if your parents or siblings have a history of a serious medical condition. For some people, this may affect your price, as there can be a higher risk of you suffering from the same condition
- Occupation - If you have a dangerous job, it is possible that you will have to pay more than one person who works in a less risky occupation - for example, someone who works as an office keeper
- Smoker status - A smoker can expect to pay more for life insurance coverage than a non-smoker, due to the health risks associated with smoking. This includes all nicotine replacement products, including vaping
- Length of coverage: Long term life insurance policies may be more expensive than shorter-term insurance policies
- Coverage: You decide how much you want to cover - in general, the higher this amount, the higher the premiums
It doesn't matter if you are not a marathon runner eating kale with a parent or sibling with a medical condition, or if you work in a more dangerous job - or even if you are a smoker. It may cost you a little more in installments. Whether you get to cover and what to pay depends on your personal circumstances - so it will be different for everyone.
It is important that you answer any questions the insurance company asks you accurately and honestly when applying because if you don't, it can have a devastating effect on your loved ones - it can affect whether your insurance company is able to pay a claim on the policy in full.
What does my life insurance cover?
Life insurance is designed to help your family cope financially when you die. You will not be paid if you have an illness or disability and are unable to work and support your loved ones - if this is the product you are looking for, you may consider covering a serious illness. What life insurance will cover and what not will depend on the insurance company you work with, so check your policy documents, but the basic principles are the same.
But yes, if you die in a bungee jumping accident, we will still pay - however, there are no guarantees that your loved ones left behind will forgive you.
Can I choose who the money goes to when I die?
Generally, the answer is yes - but you'll need to make sure you have the correct arrangements in place.
If you have a co-life insurance policy, then when you die, the money will usually go to the surviving policyholder, that is, the other person you had the policy with - unless you have made other arrangements.
If you have a single life insurance policy, the money will be paid into your property. Here is where it is really important to express your desires.
If you want to choose a beneficiary (the one who will benefit from a lump-sum payment from the life insurance policy), you may consider placing it in a trust. Here are the potential benefits of doing this:
- Because the policy is placed in a trust, it will not be counted as part of your taxable property upon your death. This means that any money passed on to the beneficiaries is usually exempt from inheritance tax
- Funds can reach beneficiaries more quickly if you hire additional trustees who will handle this after your death
You can also indicate who you would like to receive money from your life insurance policy when writing a will - however, this may not be as tax-effective as placing it in the Trust.
It is a good idea to seek independent legal and financial advice when considering placing a life insurance policy in a trust or writing a will.
Do I need life insurance?
Whether you need life insurance depends on your circumstances. Think if any people depend on you financially, such as a partner or children. If so, life insurance is a way that you can help give them a financial safety net if you don't exist to provide it anymore. Life insurance payments can be used to help pay mortgages, cover parenting costs, and cover monthly bills. If you haven't made any provisions for your loved one in the event of your death, you may want to consider life insurance.
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