This article provides an overview of how life insurance works and some of the different options to consider when taking out a life insurance policy.
Life insurance is a popular way of planning for the future financially. Whilst we don’t like to think about it, death is inevitable, so it can give you peace of mind knowing that you’ve appropriate financial provisions in place. But is life insurance appropriate for everyone and how does it work?
Who needs life insurance?
Life insurance is designed to pay out a lump sum to your dependants in the event of your death. If there are others who rely on you financially, then a life insurance policy can help mitigate the fall in income that they’ll experience when you’re no longer around. Life insurance can also be used to provide for funeral expenses, or even be used as a means of providing an inheritance.
Is a medial required?
Whilst some insurers do require that you have a medical, others don’t. There are a number of insurers, particularly those who offer over 50s life insurance, who accept you without a medical. It is worth bearing in mind, however, that cover is more expensive and that there is a qualifying period, usually the first one and two years, where the policy will not pay out.
What types of cover are there?
There are a number of different types of life insurance. The most common is term assurance. These policies run for a set number of years and if you die within the term of the policy, it will pay out a fixed lump sum. A variation on this is decreasing term assurance. With these policies, the lump sum payable decreases over time, usually in line with the outstanding balance on your mortgage.
An alternative to term assurance is a whole of life policy. These policies cover you up until the point you die provided you continue to pay the premium. They are a type of investment policy and often used or inheritance purposes. The premiums change over time, however, so you need to be sure you can cope financially with any increases.
How much cover do I need?
How much cover you need will depend on your personal circumstances. If you have a young family and high mortgage for example, you may want to buy more cover than someone who has teenage children and has paid off a substantial portion of their mortgage. Of course, the more cover you buy, the more expensive it is, so you may have to strike a balance between the level you buy and the premium you’re prepared to pay.
If you’re thinking about taking out life insurance, research the market. Use one of the many online tools that help calculate the amount of cover you need, compare quotes from different providers or use the services of a broker or independent financial advisor. With the right policy in place, you can then relax and hope you don’t need to use it for a while.
Kim Storey writes regularly about personal finance for a range of websites and blogs. She is particularly interested in products that help with financial planning, such as over 50s life insurance.
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