Life insurance provides your dependents financial protection if you die. Your life insurance policy will pay your dependents money, if you die within the term of the policy. The amount of money paid out will depend on how much cover you, as the policyholder, buys. There are basically two types of life insurance products:-
Term Life Insurance Policy: Term life insurance policies provide financial protection for a specified period of time, known as the policy term. Policy terms can generally be 5 years, 10 years, 20 years, 25 years etc. You have to specify the term you want protection for, when you buy a term life insurance policy. Term life insurance policies will pay-out, only if you die within the policy term. There are no survival benefits in term insurance policies.
Whole of Life Insurance Policy: Whole of life insurance policies cover the insured for the whole of their life. These policies guarantee a lump sum pay-out when the policyholder dies, no matter when the policyholder dies as long as the policyholder keeps up with the premium payments. Whole Life Insurance policies are generally used for estate planning.
Whole Life Insurance Policies are much more expensive than term life insurance policies. For some whole of life insurance policies, premiums can increase over time.
Death is a morbid topic and understandably many of us do not want to think about death, least of all, plan for it. However, as rational beings, we should try to understand the harsh consequences, not just emotional but also financial, of the untimely death on our loved ones. If you have loved ones who are financially dependent on you, then an untimely death is likely to cause serious financial distress to your loved ones due to loss of income, possibly force them to drastically alter their lifestyles and give up on their aspirations. If your family lives in a house with a mortgage that you pay, then they may lose their home, if they do not have sufficient income from other sources to make the mortgage payments. Life insurance with sufficient cover will protect your loved ones from unnecessary financial distress and may enable them to continue to pursue their aspirations.
Life insurance should be an important financial consideration if you have school age children, a partner who is financially dependent on you, if your family live in a house with a mortgage that you pay. Some insurance customers also want their life insurance policies to cover their funeral expenses. You may decide you do not need life insurance if you are single, have a partner who can take care of your family’s needs or, if you think that in your absence, your dependents can survive on state benefits. If you are in doubt whether you need life insurance or not, you should seek appropriate professional financial advice.
Your life insurance cover should be able to take care of all the known expenses of your dependents and help them to continue to meet their aspirations. Financial advisors often recommend 10 times your annual salary or income as a reasonable life insurance cover amount. However, more detailed individual calculations are likely to be necessary in order to arrive at a cover amount that meets all your life insurance needs. Your life insurance cover should be sufficient to pay off any outstanding debt like mortgage, credit card and other loans. If you have children, then your insurance cover will also need to pay for childcare, school fees and/or higher education costs. After ensuring debt repayment and children’s education is taken care of, your life insurance cover should also be sufficient to meet regular expenses like utility bills, council tax (if you own a property) and other day to day living expenses of your dependents.
Term life insurance is, generally, the cheapest form of life insurance. Depending on your age and health conditions, at a relatively low cost of just a few pence every day, you can provide your dependents with substantial financial protection. Cost of life insurance (premiums) increase with age; therefore, the economic benefits of life insurance are much higher when you buy insurance at a young age. You should consider buying term life insurance at an early stage of your life, even before you have children/plan to have children or you decide to financially support your partner, aged parents or other dependents.
Level Cover: Level Term insurance cover assures a lump sum payment to the beneficiaries if the policyholder dies during the term of the policy. The amount of death benefit or life cover is guaranteed and remains the same throughout the policy term. The customer needs to choose the amount of cover to be purchased and the length of the policy term when buying a term life insurance policy.
Decreasing cover: In a Decreasing Term insurance cover, the amount to be paid out in the event of death decreases over the term of the policy – if death happens earlier than the final policy term, beneficiaries receive a bigger payout compared to the amount they would receive if death occurs later. Decreasing term life cover is often used to cover mortgages as the mortgage amount owed by the insured to the bank/lender reduces over time due to interest and principal re-payments. Since the life insurance cover decreases over the policy age, the cost (premiums) of decreasing term cover is lower than level cover.
Single life insurance policy: A single life insurance policy covers a single person (policyholder). If the policyholder dies within the term of the policy, then the life insurance company will pay-out the cover amount to stated beneficiaries.
Joint life insurance policy: A joint life insurance policy covers two people. The insurance company will pay-out the cover amount if any one of the joint policyholders dies within the policy term. This type of policy is known as ‘a joint life, first death’ policy. It is important for life insurance customers to know that the insurance cover ends when one of the joint policyholders dies, the surviving person is left without life insurance cover.
There are several points to consider when deciding to buy life insurance for one’s partner. A joint policy will cost less than two single life insurance policies, but it is worth considering if both the partners need the same cover? If one of the partners earns much more than the other, it is likely that they will need a higher cover than the other partner. It is important to estimate how much cover both need individually and see if a joint life policy is appropriate and works out to be cheaper for the higher cover compared to two single life policies for the individual cover amounts. It is important to note that if, in the future, you and your partner were to separate during the policy term, the insurance company may not able to split your joint life policy into two separate single life policies.
Joint life insurance policies are usually purchased by couples, but you can take a joint life insurance policy for any person who is financially dependent on you – business partners fall in this category. Should one business partner die during the policy term, the surviving partner can use the policy payment to purchase the deceased partner’s share of the business by paying into the deceased’s estate.