Frequently Asked Questions on Life Insurance
We've tried to answer as many of your questions as possible, if there is something missing from here which you'd like to know please do get in touch!
In this guide:
- What will I be covered for?
- Should I consider life insurance?
- Do employers offer life insurance?
- How does term life insurance work?
- How does your payout change over time?
- How long should I get cover for?
- What do I do if I want a payout to be guaranteed?
- Will my life insurance premiums change throughout the policy?
- How much should I expect to pay for life insurance?
- Can I get life insurance if I am already ill?
- How does age affect life insurance prices?
- What if I want to insure my partner too?
- Do my family need to pay tax on the payout?
- Is the money always paid as a lump sum?
What will I be covered for?
Life insurance policies are designed to pay out upon the death of the policy holder. However, even though we will all die one day, this does not mean that every life insurance policy will always pay out. Whether or not your loved ones will receive a payout is dependent upon the intricacies of your specific plan and what its exact terms and conditions are. Most life insurance policies are only designed to cover you for a certain period of time. This means that if you die within this timeframe, your family will receive a payout in line with the amount outlined by your policy.
This type of life insurance is known as "term life insurance", life insurance that pays out regardless of the time of your death is known as "life assurance" because of the fact that you are assured a payout.
Should I consider life insurance?
Life insurance can be a very important consideration for most people who want to make sure that they have put measures in place to provide their loved ones with financial security in the event of their death. It can be a great way to make sure that your debts are paid off if you pass away, including things such as the remainder of your mortgage. Life insurance can also pay for your funeral and can help your family cover their everyday expenses.
Having said all of this, life insurance is not necessary a worthwhile investment for everybody. If you are somebody who does not have any financial dependents and you are single, you may not want to spend your money on something that will only yield benefits when you are no longer around to reap them. In a similar way if you have children but they are of an age where they can provide for themselves financial and no longer rely upon you for their wellbeing or accommodation, there may be no real need for you to take out a life insurance policy.
Do employers offer life insurance?
There are many employers who offer what is referred to as a death-in-service benefit. This death-in-service benefit is a payment that your family will receive from the company that employs you, if you die whilst still being employed by them. This benefit will come in the form of a lump sum and normally equals about four times your yearly salary. This can sometimes be enough to help your family with the immediate financial burden that they will be placed under but you may want to take out some extra cover depending on what you need.
How does term life insurance work?
Term life insurance is the most commonly chosen form of life insurance and also the most affordable - when compared to life assurance. This form of life insurance works upon the basis of deciding on a set time period and covering you for that - this time period is what is referred to as the term. This means that if you agreed upon life insurance that lasted for a 20 year term, you would be covered for that period and if you were to die, your family would receive a payout. Once the agreed upon term has finished, your cover will expire and your family will no longer receive a payout in the event of your death.
How does your payout change over time?
The answer to this question changes depending on the type of insurance policy that you take out. If you take out a level term insurance policy, the amount that you receive as a payout will stay the same no matter when you die - as long as you die within the term of the policy.
You also have the option of taking out a decreasing term life insurance policy, these policies give a lower payout the longer that the policy goes on for. This means that if you were to die in the first year of your policy, your family could receive something like £150,000. If you were to die in the last year of your policy, your family would receive a much lower sum. The main reason that people take out decrease term life insurance is to cover their outstanding debts in the event of their death. Things such as mortgages will be paid off as time passes and you move through the term therefore your family will need less money to finish its payment the later your insurance pays out.
How long should I get cover for?
This is question that purely depends on your own, personal situation. Some people decide to choose a term that will last until their children have reached the age of 18 whilst others choose a term that will go until their children have finished university. It really does just come down to what you want to get out of your life insurance plan. You should also take your age into account when making this decision as that will affect the amount that you pay for your policy.
What do I do if I want a payout to be guaranteed?
Some people would like to choose a life insurance plan that will make a payout regardless of the time of their death. Fortunately this is possible to achieve by taking out what is referred to as a whole of life assurance policy. This then means that the payout your family receives will not be dependent on when exactly you pass away. One thing to bear in mind if you do decide to go down this avenue is the fact that the cost of whole of life assurance is normally quite a lot higher than normal term life insurance.
Will my life insurance premiums change throughout the policy?
The vast majority of life insurance plans offer what they refer to as "guaranteed" premiums, this means that the amount that you pay is fixed throughout the entirety of the plan and you don't need to worry about them changing unexpectedly. This is definitely worth checking in the fine print before you sign up to a life insurance policy because not all of them have "guaranteed" premiums. Some life insurance plans have what is referred to as "reviewable" premiums, these reviews normally result in price rises due to the fact that you will be older than you were when the insurance plan started.
This is different if you were to take a whole of life assurance policy because normally your plan will be tied to an investment, if this investment does not do well, the provider can up the cost of your premiums.
How much should I expect to pay for life insurance?
The cost of different life insurance policies vary a lot depending on what form of plan you are taking out and also on how large you want the payout to be. As with all forms of insurance, providers are essentially betting against you making a claim. This means that if they view you as a higher risk candidate, they will charge you more for insurance than they would somebody who was at a lower risk. This means that if you are somebody who is in great physical shape and leads a healthy lifestyle, you can expect to pay slightly lower rates on your premium than somebody who is not. They also take age into account when deciding upon the cost of your plan, as a general rule the older you are the more expensive the plan will be however there are other factors taken into account. If you are a smoker, quitting will definitely lower the rates that you need to pay.
Can I get life insurance if I am already ill?
Some people find it difficult to take out life insurance if they have already been diagnosed with a serious medical condition, due to the fact that there are many insurance companies who will not allow policies to these people. There are however some companies that will still allow you to take out an insurance policy at a higher premium. There are other companies that offer policies which exclude cover for the disease you have been diagnosed with but will cover you if you die from a cause that is unrelated to it. You should check with an insurance company directly to find out exactly what is covered by the policies they offer, this way you can find out if the plan is relevant to you or not before you sign up to it.
How does age affect life insurance prices?
There is a general rule that applies to life insurance prices in relation to age and that is that the older you get the more expensive your premium will be. The reason for this is fairly straightforward - that the older you are the shorter your life expectancy and therefore the likelihood is higher that you will pass away whilst on the plan.
However, age is not the only thing that your insurer will take into account. They will also consider things such as your general health and lifestyle so it is important to focus on these things especially if you are older and looking for an affordable policy. There are still a lot of insurers who will cover somebody over the age of 50 and some of them will even do this without requiring a medical first.
What if I want to insure my partner too?
There are many couples who are now opting to take out what are known as joint life insurance policies that offer shared protection between partners. This offers the benefits of being less complicated due to the fact that you are required to fill out half as much documentation. They are also considerably cheaper than the alternative of taking out two separate policies - one for each of the individuals. However when considering one of these policies, it is important to remember that they work on a first death basis when it comes to paying out. This means that the policy will only payout on the first death out of the two policy holders. This will leave the second partner without life insurance cover and facing the prospect of higher premiums in order to take out a new policy due to their increased age.
Do my family need to pay tax on the payout?
The payout that your family receive as the result of your life insurance will not be taxed by capital gains or income tax. However there is a chance that it may fall under inheritance tax in some situations. This can be easily avoided if you make sure that when you are writing your policy it is written "in trust". Writing it up "in trust" allows the payout to go straight to your dependents without being in anyway affected by inheritance tax.
Is the money always paid as a lump sum?
You can choose how you would like your family or beneficiaries to receive the insurance payout in the event of your death. There are some plans that offer to pay out the money as one lump sum and on which your family will simply receive the entire payment at once. Alternatively you can ask for your family to receive the payment in the form of an income. This often make the money easier to manage for those receiving it.