Life insurance can play a crucial role in safeguarding the financial well-being of your loved ones, offering a safety net in times of uncertainty. In most cases, life insurance will provide a payout upon the policyholder’s passing, ensuring that essential expenses and debts are covered, and helping to keep families shielded from financial hardships during already challenging times.
But, how exactly does life insurance work, and what should you know before making this important decision? In this article, we will be covering:
- What life insurance is
- How to understand the different types of life insurance available
- Debunking premiums and exclusions
- Understanding what life insurance policy may be right for you
Let’s dive in and explore how life insurance can offer you peace of mind and financial security for your family’s future.
Understanding Life Insurance Basics
Life insurance is a financial product designed to provide a financial safety net to the policyholder’s loved ones in the event of their passing. Its primary purpose is to offer a lump sum, called a death benefit, to beneficiaries, ensuring that they are financially secure and can cover expenses, debts and any long-term needs when the policyholder is no longer there to provide – especially pertinent if the policyholder is the main breadwinner in the household.
There are two main types of life insurance: term life and whole life insurance.
Term life insurance offers coverage for a specific period (the term), often with lower premiums, making it a more cost-effective choice than some other types, while it is a temporary level of cover as opposed to more long-term agreements.
Whole life insurance provides whole, life-long coverage and includes a cash value component that grows over time, serving as both an insurance safety net and an investment.
The choice between term and whole life insurance depends on your individual financial goals and needs, whether short-term protection or long-term financial planning is your priority.
The Application and Underwriting Process
Applying for life insurance typically begins by contacting an insurance provider. You’ll need to complete an application form and provide personal and medical information to help the insurance company assess your risk and determine your premium, or monthly charge, for the service.
The underwriting process is a critical step in getting approved for life insurance. Underwriting is the process of an insurance company assessing an applicant’s risk factors, medical history and other information to determine their eligibility for coverage and set appropriate premium charge rates.
This will involve an in-depth review of your medical history and lifestyle, and it may be necessary for you to have a medical examination to affirm any claims in your medical history. The checks are likely to go further and include family medical history to determine the risk factors from hereditary issues for more extensive life insurance cover, after which your underwriter will then set your premium based on this information, upon calculating your overall ‘risk’ level.
It’s essential to be honest during this process, as providing accurate details is crucial for obtaining the right coverage and ensuring your beneficiaries receive the full death benefit upon your passing. Deciding not to disclose certain information can also lead to your policy being void, and potentially leaving your loved ones with nothing upon your passing, which is a risk not worth taking.
It is possible to change your policy once it’s started, which we’ll cover later on in more detail, adding certain coverage options to help in times of medical unrest.
Premiums and Policy Costs
Let’s now take a look at typical premiums and policy costs. Simply put, the more risk factors – such as your age or existing health conditions – you present to the insurer, the higher your premium (monthly payment) is likely to be.
Premium costs vary significantly depending on key factors, with age playing a crucial role – younger individuals will typically pay lower premiums because they present lower mortality risks. Health is another critical factor, with individuals in better health generally benefitting from more affordable rates, and those with less favourable positions encountering higher premiums.
As previously mentioned in the underwriting process, lifestyle choices, such as smoking or engaging in high-risk activities such as some extreme sporting activities or high-risk professions such as long-distance driving can increase your premiums due to the risk involved in those activities. The coverage amount and policy type, whether it’s term or whole life insurance, can also influence the costs.
For example, this can mean that a 30-year-old non-smoker in excellent health, applying for a 20-year term life policy with a £250,000 coverage amount, might pay around £20 per month. In contrast, a 50-year-old who smokes and has a history of health issues might see higher monthly premiums, potentially ranging from £80 to £150 for the same coverage amount and term, as a result of their lifestyle and health factors.
This is why it’s essential that you speak to an insurance provider to get personalised advice about which policy might be the best choice for you and your specific needs.
Types of Life Insurance Policies
As you’d expect, there are a number of life insurance policies suitable for various financial needs. Term life insurance is a popular choice, providing coverage for a specified term, often with fixed premiums, while whole life insurance offers life-long coverage and includes a cash value component.
There is also family income benefit that can provide regular payments to beneficiaries; over-50s plans which are tailored for individuals aged 50 or older, usually without the need of checking their medical history, and mortgage protection insurance which covers any outstanding mortgage balances upon death so that your loved ones do not have to deal with financial burdens.
You can also apply for joint policies which allow multiple individuals – such as partners or married couples – to be covered under a single policy, which often comes in at a more affordable rate. Critical illness cover can be added to a life insurance policy, providing a payout if the policyholder is diagnosed with a critical illness.
Lastly, income protection insurance replaces a portion of the policyholder’s income if they are unable to work due to illness or injury, ensuring ongoing financial stability for themselves and their beneficiaries. These variations of life insurance cater to specific financial goals and offer added layers of protection to address a wide range of scenarios and needs, helping you to find coverage that is suitable for your specific needs.
Policy Benefits and Payouts
Let’s take a closer look at some of the most common life insurance policies and their benefits.
Term life insurance will provide financial protection for a specified term – usually 10, 20 or 30 years, but they can be as low as 5 years. These typically have affordable premiums and are useful for covering temporary financial obligations such as mortgage repayments.
Whole life insurance, as the name suggests, offers coverage for the entire lifetime of the policyholder. This policy helps to build monetary value over the policy period, which can then be borrowed or used for investment purposes, making it more favourable for those wanting to provide a ‘legacy’ for their beneficiaries.
Critical illness cover is usually applied as an add-on to existing life insurance, and it offers coverage payments in the event the policyholder is diagnosed with a critical illness. This can provide essential financial support to cover medical expenses, rehabilitation, or lifestyle adjustments during an illness, especially if the policyholder is unable to work as usual.
Unlike other policies, over-50s life insurance is usually provided without the need for a medical examination. This will offer a cash payout upon the beneficiary’s death, which can commonly be used for funeral or other end-of-life expenses, or can help to ensure a level of financial security for left behind loved ones.
In most life insurance cases, policy payouts are typically triggered by the policyholder’s death, and beneficiaries receive the funds as a lump sum or regular payments, depending on the policy’s terms and conditions. However, in the case of income protection, this will pay out a steady stream of financial aid while the policyholder cannot work as usual to ensure bills are continued to be paid, over a term agreed at the inception of the contract.
It’s also possible to break insurance policies and request pay outs at certain points, but these will likely come with termination fees and added costs. Common uses for life insurance payouts include covering funeral expenses, paying off outstanding debts like mortgages or loans, funding a child’s education or providing income replacement for surviving family members.
Coverage Terms, Options and Adjustments
Choosing a policy is one thing – you then need to contend with choosing your policy term to represent the duration of your chosen coverage. Shorter terms often mean lower premiums, but the coverage is likely to expire if the policyholder outlives it – whereas, longer terms can provide an extended protection that outlives the beneficiary, but they do generally come with higher monthly costs as a trade-off.
Think of your policy as your basic package – you can then choose to add on additional options and supplementary coverage to customise your policy. Critical illness add-ons can provide payouts upon diagnosis to offer financial support during treatments, while income protection add-ons can ensure an ongoing income in case of disability which prevents the policyholder from working, for example.
These options have the power to enhance your policy’s flexibility and protection, but will usually come at an additional cost to you. Depending on your original plan’s coverage, you will likely be able to modify your insurance coverage to add on or remove certain aspects to provide help where you need it most.
As such, it’s vital that you regularly review and update your life insurance policy in line with your changing life circumstances. Significant life events – such as marriage, parenthood and homeownership – may warrant a need to adjust your policy to ensure that your coverage continues to provide the right level of financial security for your evolving needs.
Choosing the Right Life Insurance
When choosing a life insurance policy, it’s important to assess your specific financial needs. You should consider factors such as any outstanding debts and your family’s financial reliance on you – especially important if you are the primary earner in the household – opting to choose an appropriate coverage and policy type that aligns with your circumstances.
Choosing life insurance can seem daunting with so many options to choose from, which is where the expertise of a financial advisor can come into use as an invaluable tool in your decision-making process. An advisor can help you evaluate your financial situation and explain to you the benefits of different policies to help you make an informed choice to suit your financial needs.
For peace of mind, they can also provide guidance on choosing the right policy type and coverage amount to ensure that you have the protection you need for your loved ones’ financial security.
Although you may not like to think about it, there is genuine worth in having life insurance coverage. Life insurance isn’t just about planning for the future – it’s about ensuring that those you love and leave behind are well-cared for when it comes to looking after any of your outstanding debts such as mortgages.
Life insurance payouts are useful to cover funeral costs and other end-of-life payments, alleviating a little extra hardship at an already hard time in life. It can also be a helpful financial aid in the event of critical illness, helping to keep payments coming in during a time when you might not be able to work as usual.
Whether you’re starting a family, buying a home, or simply seeking long-term financial stability, life insurance is a reliable ally in your journey towards securing your financial future.