Life insurance is essential for those who want to ensure their family is financially protected in the event of their death. Choosing the right life insurance plan requires careful consideration. While some options are better suited for some people, others won't be ideal for everyone. This article outlines the key considerations to take into account when selecting a policy.
What is life insurance?
Life insurance is a type of insurance policy that can provide peace of mind for those left behind when you die. While it won't be able to bring you back when you pass, it can ensure your family has financial support in your absence. The basic principle behind life insurance is simple: You pay monthly premiums for cover, and if at any point you die, the insurer pays out a lump sum to your loved ones.When you take out a life insurance policy, you decide how much cover you want and how long it will last. As already mentioned, you are then required to pay a monthly premium to your insurer. Failure to keep up with these payments could result in your cover being ended early. In this case, you won't receive any money for the premiums paid previously.
Types of Life Insurance policy plans
There are two main types of life insurance plans – whole and term. Although both provide a lump sum for your family after your death, these policies have some significant differences.
Whole life insurance
Whole life insurance cover lasts for the rest of your life, paying out a cash lump sum when you eventually pass away. During this time, both the cost of your premiums and payout amount remain fixed. Premiums for whole life policies are typically higher compared to other types of cover. However, it pays out regardless of when you die, making it a safe choice of plan. This type of plan has two levels of cover:
- Standard – Your premium rate and death benefit value stay fixed throughout the policy. That way, you pay the same amount for cover over time. It's beneficial when you get older, in which premiums tend to rise.
- Maximum – Unlike standard cover, the insurer invests the money from your premiums to make a return that covers the eventual death benefit. This type of cover can be risky; if the investment fails, your premiums may be increased to make up the loss.
Term life insurance
Unlike whole life insurance, term life insurance has a set policy term lasting for several years. The policy pays out if you die within this time. If not, the policy expires, and you'll need to take out further coverage if required. It's also usually cheaper than whole life insurance, as cover is only temporary.Term life insurance has 3 levels of cover
- Level term – The standard type of term life cover. During the policy, both your premiums and pay out value remain fixed.
- Increasing term – Designed to protect the value of the death benefit from inflation. In doing so, the value increases over time. However, your premiums can also rise as a result.
- Decreasing term – Used to help your family cover large payments like a mortgage. The policy is set up alongside the balance of your mortgage, with the payout decreasing as you make repayments.
Other types of plans include:
- Mortgage life insurance – A policy taken out to help your family cover your home's mortgage if you die before it's repaid. This is usually referred to as decreasing term life insurance.
- Family life insurance – Set up to provide support for your family if something happens to you. It can provide childcare support and leave a legacy for your children.
- Joint life insurance – Popular with couples, this type of policy covers two people under a single policy. It pays out after the first death in the couple (known as first death), or once both you and your spouse have died (known as second death).
- Critical illness cover – Although it doesn't cover you in the event of death, critical illness cover can be a smart choice for cover. The policy pays out if you are diagnosed with a serious illness or injury in which you are unable to work. This can include heart attacks, strokes, certain types of cancer, organ failure. etc.
- Guaranteed life insurance – Designed to provide cover for those who may be unable to afford or denied covered for standard policy plans. This could be due to age, illness or occupation. You are guaranteed to be accepted regardless of your age or health. However, premiums can be expensive, and payouts tend to be much lower than a standard policy.
Choosing the right plan
When choosing a life insurance policy, consider what you're looking to achieve. Do you want to leave an inheritance? Or do you just want to ensure your loved ones are financially secure? These factors will determine which type of cover you choose.
Know your budget
Your financial situation should be considered when choosing a policy. It's important that you choose a policy which you can afford, otherwise the policy may be cancelled if you cannot make payments.The cost of life insurance depends on a range of factors, such as:
- Age – Younger people generally pay less for their cover than older people.
- Health – Those with pre-existing conditions may find themselves paying higher rates.
- Occupation – Some occupations carry a higher risk of dying early than others, resulting in higher premiums.
- Lifestyle – People who smoke, drink alcohol excessively, eat unhealthy food, and don't exercise regularly are likely to pay higher rates.
The type of policy you buy also has an effect on your premiums. Whole life policies are often one of the more expensive types of cover, so if you're looking to save money, a term life policy may be better suited.
Work out how much cover you need
In order to choose the right type of policy, you need to consider your family's financial situation and goals. This means understanding how much coverage you need to cover your family's expenses after your death, and how long you want to leave them without income.You don’t necessarily need a huge amount of life insurance coverage, but having enough to cover your debts and provide adequate funds for your beneficiaries is important. The key is to determine how much is necessary for your family to be financially secure, rather than simply buying too much cover.
Explore your options
Each type of life insurance plan has its own benefits and drawbacks, so it's worth doing some research into each option to see which suits your needs best. Before you get a quote, it may be wise to get in touch with a life insurance adviser for further guidance.