This guide to life insurance expands on how an insurance policy works, different types of policies available and how you can shape a life insurance policy around your life. In simple terms, a life insurance policy is an agreement whereby an insurance company will payout to a designated beneficiary on the death of an insured person.
Amongst all insurance policies available, life insurance is one of the most difficult to discuss because ultimately, it involves financial protection for those left behind after the death of a loved one.
When you consider many households will have mortgage debt, credit card debt, personal loans, and other finance, lump-sum payment upon debt could help avoid serious financial trouble.
Do I Need Life Insurance?
Life insurance offers financial support to those left behind in the aftermath of your untimely death. Yes, this is not the easiest subject to bring up, and for some, it can be upsetting.
However, the potential for survivors to be left with huge debts and a huge hole in household income needs to be addressed. In exchange for regular premiums, there are various kinds of life insurance policies available which can ensure that your loved ones are provided for after your death.
When Do Life Insurance Policies Pay Out?
Under normal circumstances, life insurance payments will be released relatively quickly in the event of the death of the individual named on the policy. The immediate aftermath of the death of a loved one is traumatic in itself without additional financial pressures.
There are certain formalities to go through, such as confirmation of death, death certificate, but once the paperwork has been completed, the process should be relatively quick.
Where Is the Life Insurance Payment Sent To?
The life insurance industry is relatively flexible, with an array of different policies available to suit different scenarios. For example, lump-sum payment on death may be paid directly to the named beneficiary or directly to a mortgage company to pay off any outstanding debts.
Normally, the lump-sum payment would be sent directly to the beneficiary at which point they can choose what, if any, debts to repay.
What Are the Different Types of Life Insurance Policy?
There are numerous types of life insurance policies including whole of life cover, term insurance, decreasing term insurance, increasing term insurance, renewable term insurance, joint life insurance and death in service benefits to name but a few.
It is fair to say choosing the right policy for your situation can be challenging; therefore, you should consider taking professional advice.
What Is Whole of Life Cover?
Whole of life cover is what you would expect; it guarantees payment to the named beneficiary no matter when you die. There are other types of life insurance policy which only pay out on death during a certain period. As a whole of life insurance has no fixed term, the premiums will be more expensive.
What Is Term Insurance?
Term insurance is a type of life insurance policy which can be shaped around, for example, your mortgage term. Let us assume that you had 20 years to go on your interest-only mortgage; you could take out a 20-year life insurance policy which would cover the repayment of capital in the event of your death.
Limiting the length of the life insurance policy in this manner (as opposed to a whole of life policy) will reduce your premiums.
What Is Decreasing Term Insurance?
If we assume that you have a capital repayment mortgage with 20 years to go, the mortgage liability will reduce as interest and capital is repaid month by month. Therefore, in this instance, it makes sense to look at decreasing term insurance where payment on death would follow the downward path of your mortgage liability.
As the life insurance payout would reduce the length, you live this gives scope for reduced premiums compared to traditional term insurance.
What Is an Increasing Term Insurance?
On the flip side of the coin, increasing term insurance is a life insurance policy where the payment on death is increased year on year. It is common to link this increase to the RPI index/inflation, thereby ensuring that beneficiaries are provided with sustained relative buying power going forward.
What Is Renewable Term Insurance?
As the term suggests, renewable term insurance is a form of term insurance where the policy can be renewed for a predetermined period of time upon initial expiry. One other benefit is the fact that you can extend the original term insurance without the need for a medical.
There may be a standard increase in premiums reflective of your age at the time but no additional medical checks.
What Is Joint Life Insurance?
Joint life insurance is a popular form of life insurance whereby two individuals are named on the policy, but only one payment will be made. Irrespective of which party dies, life insurance will be paid out on the death of the first person then the policy will end. This ensures a degree of financial assistance for the surviving party.
