A quick guide to life insurance

by | Oct 29, 2023 | Life Insurance

What is life insurance?

Life is often unpredictable. As such, many opt for life insurance policies in order to afford their loved ones some financial stability in the event of their death. The most common form of life insurance is when an agreed lump sum of money is paid to your beneficiaries if you die while the policy is in force, in exchange for the payment of a monthly premium. The pay-outs are not seen as part of your estate provided they are written in trust, meaning they are tax-free, including inheritance tax-free.

What is life insurance for?

The idea of life insurance is to provide financial security and assistance for your loved ones in the event of your death. As such, life insurance is especially beneficial in financially-dependent relationships and regarding debts. For instance a common example regarding financial dependency is among familial situations, where two adults in a legal partnership may be financially dependent on each other, or where a child may be financially dependent on a parent. Regarding debts, a good example is a mortgage. You may wish to take out a life insurance policy in order to pay off any outstanding debts on a property, in the event of your death to ease the financial burden on your partner.

What types are there?

When assessing your options, it is often difficult to work out exactly what type of policy to take out. The right option may vary depend on your life situation.

  • Term vs whole-of-life insurance.
    One type of policy is whole-of-life insurance. This refers to a policy that covers your entire lifetime. This is the more secure, however more expensive option. Fundamentally, it means that whenever you die, your loved-ones will receive a pay-out. You have to make sure you are able to pay the premiums, not only while you are working but also into retirement.
    There are two types of whole-of-life insurance:
    1. Balanced/Standard Cover
      With this form the premiums you are paying remain constant throughout your life, meaning you will be paying the same amount monthly during retirement that you were paying when you first took the policy out, even if you started experiencing health problems. This is the more secure option as it allows for easier financial planning in order to ensure a healthy policy.
    2. Maximum Cover
      With this form the policy is linked to an investment fund, with your insurer investing the money you pay in each month. This is the more volatile option, as depending on the success of the investments, the cost of your premiums and the value of your cover can fluctuate.

    The other form is term life insurance. This type of policy has a fixed term, meaning the insurer will only pay out if you die within that time. If you don’t die, you won’t receive any of the cover back once the term has expired. There are several forms of term life insurance:

    1. Decreasing term cover is generally linked to large debts, with the policy, in the event of death, covering any of the debt that is still owed. The premiums will however stay the same throughout the policy. As such, the pay-out will be greater if you die earlier in the term, and less if you die later. This type of cover is often linked to a mortgage.
    2. Level term policies – if you die during the term, these policies pay the same amount, no matter when you die. This means slightly more expensive premiums when compared to decreasing term cover.
    3. Increasing term policies – rise by a certain fixed percentage. This may be an inflation-linked index, for instance the Retail Prices Index or the Consumer Prices Index.
  • Single life vs joint life insurance policies
    Single life insurance policies cover a single person for the duration of the policy term, paying out if you die during your term. They are paid into your estate, allowing you to choose your beneficiaries.
    Joint life insurance policies cover two people, and as such are most applicable to couples. The caveat with these is that they pay out after one person dies, ending the coverage and giving the lump sum to the beneficiaries. By default the recipient will be the surviving partner unless other arrangements are made.

What influences your life insurance premiums?

The amount you are obliged to pay monthly often depends on your life situation. This includes a number of different factors :

  • Age – As you get older, you tend to become more at risk of developing medical issues. As such, policies will become more expensive as you get older.
  • Lifestyle – many lifestyle choices can lead to a lower life expectancy and higher risk of medical complications. These may include things like a poor diet, high alcohol consumption and a lack of exercise. As such, this may increase the cost of policies.
  • Health – Pre-existing medical conditions will tend to increase premiums.
  • Family Medical History – Premiums may increase if members of your family have a history of serious medical conditions, due to the increased risk of your own affliction with those conditions.
  • Occupation – Premiums tend to be higher for those with more dangerous jobs. For example, someone working on an oil rig may need to pay more than someone working in an office.
  • Smoker Status – Smoking and vaping cause increased medical risks, and as such can impact a policy-holder’s life expectancy, increasing the premiums.
  • Length and amount of cover – longer term policies will be more expensive, and the higher the cover, the higher the premiums.

How can the money be used.

There are many common uses, for example debts and funeral costs. Nevertheless, the recipients of the pay-out are allowed to use the money for any purpose.

To conclude:

Life insurance policies can be a complicated and difficult topic. Nevertheless, they can be extremely beneficial in securing your family’s welfare and security. They allow for mitigating any outstanding debts and protecting your financial dependents from financial instability. The first step is getting advice and adequately informing yourself.

Talk to one of our expert financial advisors today, to discuss your pension planning and achieve your ideal retirement outlook.

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