What to consider when taking out life insurance

With so many insurance products on the market and some being more urgent than others, life insurance can often be overlooked. However, it could seriously benefit you and your family in the long term should anything happen. 

Should you suddenly pass away, what would your family do? If you are the main breadwinner of the family, your death could have a dramatic impact on the entire householdís personal finances.

Funeral costs are on the rise and grieving families are generally not too worried about outstanding costs or their own financial future when a loved one passes away.

Mortgage payments, school fees, bills and general living costs would all still need to be covered though. If the worst happens, life insurance could be the little financial bucket needed to bail your family out at a difficult time.

What are you covered for?

Life insurance policies vary drastically depending on the provider, however, the majority of them will pay out on your death to members of your family should you choose. It can become increasingly important to take out the insurance if you are married or have children, as they may be financially dependent on you.

As an individual without a spouse or children, you may also need life insurance to cover basic funeral costs.

The full extent of how much life insurance you need to take out depends entirely on your own circumstances.

Some policies are designed to cover mortgage payments or other reducing loans.  Lump sums can be paid out to loved ones and payouts can also be given in the event of a terminal illness. However, to ensure that you get the most out of your money, it could be worth taking out critical illness cover as an additional extra.

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What factors are worth taking into account?

Ultimately, by reducing your health risks, you may be able to reduce your life insurance premiums. For example, according to industry experts, slimming down could save you cash.

Obesity is a huge problem in the UK, especially for the elderly. They may find it harder than most to shift excess weight.
In America, insurers regularly ask for the Body Mass index (BMI) of potential policyholders to gauge their health. British Insurers are starting to do the same, requesting individual BMI readings as part of policy applications.

ìA BMI of 35 could see a 50 per cent increase in premiums, while a BMI of 40 or more could see them double,î said Louise Cuming, Managing Director of The Life Dept. 

When should you take out life insurance?

Only those over the age of 18 can purchase life insurance. The longer you pay into a policy, the more likely it is that premium costs will be kept low. Whilst you may not have a family to care for at the moment, one day you might and investing into life insurance earlier on in life could reap benefits later on.

Not only will you need to consider the best age in your life to take out the insurance policy, but you may wish to consider your gender.

The European Court of Justice passed a ruling last March which banned the use of gender as a determining factor in deciding car insurance premium costs. This could have a knock-on effect across the board for all insurance policies, including life insurance.

The ban does not come into effect until December 2012, but it could dramatically push up the cost of life insurance premiums.

Women typically live five years longer than men, so they usually pay the rate of a man who is five years younger. As the majority of life insurance is taken out by men, prices could sway towards male rates rather than female ones. Women could see their insurance policies increase by as much as 20%, according to figures from the Association of British Insurers (ABI).

This year could be a great time to lock into a life insurance policy, especially if you are a woman. Men, on the other hand, may wish to hang back as they could see a 10% fall in premiums come December.

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Choosing the right cover

There are a number of different policies which are widely available. With a level term life insurance policy, this means the payout remains that same throughout the term. For example, if the cover you take out is for £250,000 from day one, the policy payout will still be £250,000 if you die at any point within the term.

A payout based on a decreasing term assurance will gradually get smaller until it reaches zero at the end of the policy term. This cover is typically used for people who will need to cover dwindling debt, such as a capital repayment mortgages.

When taking out life insurance, it would be advisable to review your policy regularly should your circumstances change. For example, should you have more children, take on a bigger mortgage or even get divorced with a joint policy, this could affect the payout. 

Most policies will set a minimum and maximum payout limit, but it could be worth agreeing a set limit which is big enough to pay off any debts and provide for your loved ones in the future.

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