- It will take no more than 2 minutes
- Compare 100's of life plans from the UK's top insurers
- We'll select the best advisor from our panel to get you their cheapest quote
Life Insurance 101
Getting married. Buying a house. Being a parent. Starting and building a business.
These are just some of the milestones of our lives. But along with the celebrations, these milestones come with responsibility. With these milestones come people who depend on us, people we love.
The question is, have we made preparations to ensure that our loved ones have something to fall back on in the event of our loss? One sure way of taking care of our loved ones when we're no longer around to do so is to get life insurance coverage.
But let's get into the basics of life insurance. Understanding this product and the choices you have will help in deciding which plans are best for your individual needs. You see, life insurance is not just about replacing the income of the breadwinner or provider of the family; the products are designed to also address other needs such as:
- Saving up money for a child's education or for your retirement
- An investment vehicle that provides reasonable yields
- Protect your existing assets in the event of your demise
- Make a contribution to your favorite charity or non-profit organization
- Covering a major debt such as a mortgage
Life Insurance Products
Life insurance, at its most basic, pays an amount to the beneficiaries when the Insured dies. Life insurance is a financial product that is sold based on the risks involved.
There are basically two classifications of life insurance products – the term life insurance and the permanent life insurance.
Term life insurance: This is life insurance in its most basic form. In essence, it is temporary insurance protection - you pay a premium for insurance protection lasting for a specified period (usually a year). Then, when that time is over, the cover also ends. You can, of course, renew the policy and extend the insurance cover. The premiums charged are used to pay for the cost of the insurance protection. If the Insured dies while the policy is in effect, the death benefit will be paid. When the policy has expired, there are no refunds since all the premiums are used up for the coverage. This is why term life insurance is the cheapest form of insurance.
There are also term life insurance policies that last for 10 years, 20 years or any length of time as agreed upon by both the Insurance Company and the Insured. There are some term life insurance policies that offer the option of conversion – where, after a time, you can convert the term life insurance policy into a permanent life insurance policy.
Thus, term life insurance:
- Provides more coverage for the same amount of money
- Does not accumulate cash values
- Ends when the policy ends
- May have renewal and/or conversion options
Permanent life insurance: This life insurance is called "permanent" since there are no expiry dates. The policy may have a maturity date but unlike term life insurance, you don't have to renew the policy. Permanent life insurance offers a combination of insurance protection and savings or investment. The savings component is called the policy's cash value. When one pays the premium, a portion of this goes to the cash value. For some permanent life insurance policies, the cash value allows the product to provide an endowment. When the policy matures and the Insured is still alive, he gets the endowment and he can spend it however he wants. The policy then ceases to be effective.
The cash value accumulates over time and earns interests since the cash values are also invested by the Insurance Company. The interest rate depends on the agreement with the insurance company. There are some products that offer a fixed rate of interest while there are others that provide the interest based on how well or how badly the investment does.
Thus, permanent life insurance is:
- More expensive but has cash values
- Permanent in nature
- May be an endowment
How to buy Life Insurance
Ask yourself: do you need it?
If you do not have a family or aging parents depending on you for support, if you live alone, or if you have substantial assets or savings that will enable your dependents to maintain their lifestyle even when you're gone, you may not need the life insurance coverage. However, if you have people who depend on your income, some debts and a few assets and savings, it is a good idea to prepare for the unexpected and undesired eventuality of your sudden demise.
Find out how much insurance you need.
How much does your family need in order to replace your income during the times that they will need your support?
Here are some questions you need to ask to help you determine this:
- How much do you contribute to the household income annually?
- How much outstanding debt do you have? Do you have credit card debts? Do you have a mortgage?
- What additional expenses will there be if there is only one spouse to take care of the kids? Will your spouse have to hire someone for childcare or elderly care?
- Are you planning on sending your children to college? How much will they need by then?
- How long will your children be dependent on you? How old are they?
One other way to get the approximate amount of coverage you need would be to multiply your annual salary by 10 or 12. And then add in any major debts.
When determining the level of insurance you need, remember that too much is better than too little. Also, there is inflation to think about. The amount that may be sufficient today may not be enough some 10 or 20 years down the line.
Select the type of policy you want.
Term life insurance is cheaper but only temporary. Permanent life insurance is more expensive but has cash values. It really depends on how much you can afford to put aside.
Your three basic choices will be:
Term life insurance. This will provide high levels of protection at an affordable cost. However, as you age or if there are changes to your health condition, the premiums may rise, just like in private medical insurance (www.healthinsurancequotes.co.uk). Also, if it is not guaranteed renewable, there is the possibility that the insurance company may deny your application. But you may consider that by the time you reach the age of 65, your children may have already established their careers and are not dependent on you anymore. You may choose between an increasing term, decreasing term or level term insurance.
Whole life insurance. This permanent life policy provides you with insurance cover for the rest of your life. This long term protection plan is a good way to provide money for inheritance tax if one has built a considerable estate. The cash value of the policy can work as savings the insured can withdraw or take a loan against.
Endowment life insurance. This permanent life policy provides cover for a specific number of years and then when the policy has matured, you will receive the face amount of the policy. That means if die during the coverage period, your beneficiaries will receive the death benefit plus any cash values. If you survive the coverage period, you may use the endowment for your retirement or to fund your child's education.
- Shop around. Life insurance rate comparison takes time, you can also miss the best deal. You can fill in our simple no obligation form on the right and we'll compare the market for you fast and easy.