What is Life Insurance?
Life insurance is a policy designed to provide financial security for your loved ones in the event of your death during the term of the policy, by providing them with a lump sum, which will have been pre-determined by you. There are a number of factors that will be taken into account when setting up the cost of policy, such as your health, age and lifestyle.
Term Life Insurance: You choose a fixed period of time (known as the term of your policy) and an amount of cover, paying the premium until the policy ends. There are two types of term insurance, level term and decreasing term.
Whole of life insurance: You choose an amount of cover and the policy will pay out whenever you die. You have to pay your premiums until you die or you could invalidate the policy and you may not be paid out. These kinds of policies only pay out if you die during the policy. There’s no lump sum payable at the end of the policy term.
Over 50’s life insurance: You can only apply if you are over the age of 50. There are no medical questions. You choose an amount of cover and pay a set premium each month. Some policies have age limitations for claims, but most do not.
Why should I take out Life Insurance?
- If you have a mortgage: A life insurance policy could offer a lump sum of money to clear your mortgage, taking the financial stress off the ones you leave behind.
- If you have children: You may want to leave your children a sum of money to help them with their finances, to enable a university education, to pay for a wedding or a deposit on the purchase of their first house.
- To pay final expenses: The cost of a funeral will be thousands of pounds. Nobody wants to leave their partner, parents or children to suffer financially in addition to emotionally at the time of death.
- To replace your partners income: If your partner passes away while your children are still young, you will need to replace their income. You will also have new expenses to consider such as childcare and domestic costs.
- To buy a business partner’s shares of your jointly owned company: If your business partner dies you will need to buy out their share of the company and pay the joined financial obligations, so that you aren’t forced to close the company.
- To pay off estate taxes: Estate taxes can be steep, so having insurance in place to pay them is essential to avoid jeopardizing assets or funds built for retirement. Use of insurance for this purpose is most common in large estates, and uses permanent (rather than term) insurance to ensure that coverage remains until the end of life.
When is the best time to take out life Insurance?
Every year that passes without you having a life insurance policy means that the amount you pay per month will become more expensive.
You should be able to take out some form of cover up to 90 years old, with there being specific policies if you’re over 50. You will however need to bear in mind that your circumstances will probably change as the years go by, with a partner or children needing to be covered or even to protect a mortgage taken out at a later date.
Most individuals under the age of 25 are more concerned with paying current bills than acquiring new ones. The optimal age to purchase life insurance is under 25, so that monthly premiums are less.
What will your policy exclude?
Life Insurance does not cover:
- Death by suicide
- Long-term illness
- Critical illness cover, or
- Total and permanent disability
Who needs life insurance?
Most people will benefit from some form of life insurance, with most people taking out a policy to protect their loved ones and others who may depend on them for financial support. The younger and healthier you are at the time of taking out the policy, the better value it will be for you.
Below is a non-exhaustive list of those that would potentially benefit from taking out a life insurance policy;
- Parents with children up to the age of leaving full time education.
- Homeowners with mortgages.
- Anyone with significant debts.
- Single parent families.
- Stay at home parents.
- Self employed people / business owners.
- People who only have work related insurance benefits.
- Retired people.
Most people insure their car, house contents, holidays etc. but surely protecting yours and your family’s future is the most important policy to have in place?
Considerations to make before taking out a life insurance policy:
- The higher the amount of cover, the more it will cost you every month
- The older you are, the more expensive your policy is likely to be
- If you smoke, you may struggle to find a policy, and the ones you find will cost more