Summary
A thorough and succinct initial introduction to life insurance. the article explains all the important technical termsand what type of cover different protection policies provide.
Life insurance helps your dependants to be financially secure when you die. When you buy stipulate the cash value you want the plan to pay out when you die – this money is called ”the assured sum”. The amount you pay each month is based on this insured sum, and on your age and gender.
Your payments will also be based on the type of insurance policy you need. There are two fundamental types of life insurance: level term insurance and decreasing term assurance plus many variations within these categories.
Term assurance is often purchased at the same time as a mortgage and should cover the same period of time as the mortage. If you haven’t died at the end of the insured period, you don’t get anything back. It’s a simple insurance with no aspect of investment. It can protect your family by paying out a cash sum should you die within the period of time covered by your insurance.
There are two basic types of term cover. Level term gives the same payout during the entire life of the policy which means that you beneficiaries would receive the same amount whether you died on the first or last day of the policy. Level Term cover is usually sold with an interest-only mortgage, where the entire amount borrowed has to be repaid in full on the final day of the mortgage’s term.
Decreasing term policies are where the payout reduces by a known sum each year, finishing at nothing at the end of the term. Since the amount of insurance cover falls during the term, premiums on decreasing insurance are cheaper than on level term policies. This cover is usually only taken out with repayment mortgages, where the outstanding quotes for mortgage cover reduces during the term of the mortage.
There is also a type known as increasing term insurance. Sometimes it is known as index linked insurance. This means that the potential payout increases by just a small sum annually in line with inflation. It is a good way of protecting the buying power of the sum you have insured for.
With convertible term insurance, the policyholder has the option of moving to another type of life assurance – for instance a “whole of life“. If a person does take up this option, they do not have to have any extra medical investigations.
If you want your family to receive a monthly tax free income in the event of your death, you need a type of insurance called family income benefit. This gives the policyholder’s dependents monthly payments from the date the policyholder passed away to the end of the policy’s term.
Life assurance can be bought on the internet or from the high street through banks, insurance companies, friendly societies and brokers. Many sell directly to the public. Other outlets selling insurance include websites and mortgage brokers.
Factors affecting monthly premiums include the sex, age, sum assured and whether or not you are a smoker. Some insurance companies insist on a medical before offering cover, but this is not as common as in time gone by.
Prices for life insurance change over time and if you do have a plan it can be well worth shopping around to find out if you can get a much cheaper deal. You can usually cancel your existing plan without penalty – but always make sure you have another set of cover in place before you cancel your existing policy.
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