Life Insurance Basics

What is life insurance?

Life insurance pays out a lump sum or a regular income to your partner or family if you die within the policy ‘term’ – for this reason it is also known as ‘term insurance’.

With a term insurance policy, you can choose between ‘level’ cover, which pays out the same amount no matter when you die, and ‘decreasing’ cover (also known as mortgage life insurance), which reduces over the term and is commonly used to repay a repayment mortgage on death.

With an ‘increasing’ policy, you pay a higher premium but the amount that would be paid out increases to take account of inflation during the term of the policy.

Getting the right policy

With term assurance, you decide how long the policy runs for and how much is paid out if you die within this term.

If you go for the ‘family income benefit’ option, the pay-out will be in the form of a monthly income rather than a lump sum. These monthly payments can be linked to inflation, but they will only continue until the policy comes to an end. So if you die six months before the policy ends, your family will only receive six payments as a result.

Couples also need to decide whether to insure both their lives separately or to take out a joint life insurance policy that pays out either on the first or second partner’s death.

Do I need life insurance?

Mortgage lenders usually insist on their customers taking out a life insurance policy when they take out a mortgage, however this isn’t compulsory. This can help pay the mortgage in the event of death.

In addition, most people take out life insurance to protect the people who rely on them financially, such as their children.

Similarly, single people often feel that they can do without life cover because they do not have to worry about supporting any dependants after their death. However, younger couples without children often decide that life insurance is worth paying for, particularly for the main breadwinner.

This is so that the surviving partner will not have to worry about money while he or she grieves.

Whatever your situation, if you are considering life insurance, check first whether your employment contract includes a “death in service” benefit that will go to your family should you die.

You need to work out whether this is sufficient protection and you may decide to top it up with a personal policy.

Remember, the size of your premium will be affected by the amount of cover you have.

How much cover should I have?

In general, the higher the amount of cover you have, the higher the cost of premiums. If you are only looking to cover your mortgage only, you would need to work out your outstanding mortgage amount to find the level of cover required. If you are looking to provide your family with a regular income after your death, it might be worth taking into consideration the amount you feel your family would require, plus the amount required to pay off any debts if applicable.

What factors affect the cost of life insurance?

The type of life insurance policy you choose, and of course the sum assured, will have a big impact on the cost.

Decreasing term life assurance, for example, is generally cheaper than level term assurance because the sum assured goes down in line with your mortgage debt (but is only really suitable to cover a standard repayment mortgage on which the capital reduces consistently over the years).

Other factors that will be taken into account when calculating your premiums include your age, sex, general health and lifestyle – for example, if you smoke or drink a lot of alcohol.

Extras such as critical illness insurance, which pays out if you contract one of the conditions on a pre-determined list of diseases, can make a big difference to the cost too.

How can I cut the cost of life insurance?

As explained above, the amount you pay for life insurance will depend on a number of factors, including the type of policy you choose and how you live. Easy ways to cut the cost of life insurance therefore include giving up smoking, reducing your alcohol intake and losing weight if necessary.

For healthy, young people, the most basic life insurance policies start from just a few pounds a month.

But whatever sort of life insurance you want, it is vital to shop around to ensure you are not paying over the odds.

How often should I review my life insurance?

It is a good idea to review the level of life insurance you have whenever you celebrate a major life event such as getting married, having another child or buying a more expensive home. Otherwise, the cover you have could prove insufficient to prevent your loved ones suffering financially in the event of your death.

Does life insurance always pay out?

Life insurance claims are generally fairly clear-cut, for obvious reasons. Figures from the Association of British Insurers indicate that only 2% of the life insurance claims made in 2012 were rejected, mainly because of fraud or because the policyholder failed to disclose important information when applying for cover.

It’s worth remembering that claims can be turned down if you fail to disclose even minor details about your health when taking out a policy.

To ensure that your loved ones receive the financial help they need should you die – and do not face a battle for a payout – it is therefore crucial to give full and accurate information when applying for life insurance.

How does AlwaysCompare help?

AlwaysCompare allows you to compare the cost of policies from leading insurance companies in just a few minutes. If you have a query with regards to any quotes, a contact number will be displayed where you can contact our life insurance team. Or you can contact a firm who provides advice and speak to a qualified adviser who can search the market and advise you on the right policy. Please note AlwaysCompare does not provide advice on whether a policy is suitable for you.