Life insurance – the basics
The very breath in your body may seem like a strange thing to insure but for many people, life insurance – also
referred to as ‘life assurance’ – is one of the most important policies to have in place. Quite simply, life
insurance pays out a lump sum, a series of smaller sums, or a monthly income to an assigned beneficiary if you
die.
The policy is usually taken within a given timeframe. This timeframe is up to you but 25 years is typical as it’s often the period during which you are paying a mortgage and your dependants will need to be provided for if you are no longer around to earn money.
If you are young, single and without dependants, life insurance does not tend to be a priority. After all, even if you have a mortgage, your only creditor is the bank and, in the event of your death, you can rest assured it will take possession of your home and pay itself back from the proceeds.
The policy is usually taken within a given timeframe. This timeframe is up to you but 25 years is typical as it’s often the period during which you are paying a mortgage and your dependants will need to be provided for if you are no longer around to earn money.
If you are young, single and without dependants, life insurance does not tend to be a priority. After all, even if you have a mortgage, your only creditor is the bank and, in the event of your death, you can rest assured it will take possession of your home and pay itself back from the proceeds.
How does life insurance work?
The amount your policy pays out on your death is known as the ‘sum assured’ and, as a policy holder, you will
decide on this figure according to your own circumstances. The size of your outstanding mortgage, the age of your
children and the amount your partner earns for example, are all pivotal factors. The premium you pay for your life
insurance will mainly hinge on this sum assured but there are other factors too.
How is my premium calculated?
It might smack of the grim reaper but, as well as your chosen sum assured, your life insurance premium is
calculated on the likelihood of you dying within the policy term. It’s a complex calculation but basically,
the more likely this event the greater chance of the insurer coughing up and the higher your premium will be.
Your age is therefore the most obvious consideration; quite simply the older you are, the nearer you are to death in the eyes of the insurer.
EYour gender will also play a part as, statistically, the life expectancy of women is greater than that of men. In like-for-like circumstances then, premiums for females are lower than for males.
Your health is the other important factor to the cost of your premium. So life insurers will consider whether there is a history of certain illnesses within your family, whether you are overweight or – the real stinger – whether you smoke. Smokers pay considerably more for their life insurance premiums which is probably one of the most telling indicators of how damaging the habit can be.
Your age is therefore the most obvious consideration; quite simply the older you are, the nearer you are to death in the eyes of the insurer.
EYour gender will also play a part as, statistically, the life expectancy of women is greater than that of men. In like-for-like circumstances then, premiums for females are lower than for males.
Your health is the other important factor to the cost of your premium. So life insurers will consider whether there is a history of certain illnesses within your family, whether you are overweight or – the real stinger – whether you smoke. Smokers pay considerably more for their life insurance premiums which is probably one of the most telling indicators of how damaging the habit can be.
Types of life policies
Lastly, the type of policy you opt for and the respective level of cover it offers will also determine your premium.
Where life insurance just offers protection (rather being investment-linked) it is called ‘term insurance’.
There are two key types of term insurance which relate to the actual amount of money that will be paid out if you
die.
Decreasing term life insurance
Decreasing term life insurance is when the sum assured is directly proportional to the amount outstanding on your
mortgage. In other words, as your debt to the mortgage lender decreases so does the amount paid out by the insurer.
So, at the end of your mortgage term, the benefit would be zero and the policy, valueless.
Although the benefit gradually reduces, the premium you pay for decreasing term life insurance stays the same over the chosen term which is why it is the cheapest policy available.
This type of cover suits people whose primary concern is just clearing the mortgage when they die. Perhaps for example, your partner currently earns enough to pay for the bills and food but not the roof over their head.
BIt’s also important to remember that decreasing term life insurance only works in tandem with a repayment mortgage, where you repay both the interest and the capital to the lender. So, providing you don’t borrow more against your property, what you owe can be mapped out exactly over the years.
Although the benefit gradually reduces, the premium you pay for decreasing term life insurance stays the same over the chosen term which is why it is the cheapest policy available.
This type of cover suits people whose primary concern is just clearing the mortgage when they die. Perhaps for example, your partner currently earns enough to pay for the bills and food but not the roof over their head.
BIt’s also important to remember that decreasing term life insurance only works in tandem with a repayment mortgage, where you repay both the interest and the capital to the lender. So, providing you don’t borrow more against your property, what you owe can be mapped out exactly over the years.
Level term insurance
As it says on the tin, level term insurance is when the sum assured stays level for the term. For example, if the
sum assured was £300,000 – regardless of your changing financial situation over the course of the term – £300,000
will always be the sum paid out if you die.
Level term cover suits people with interest-only mortgages that do not reduce over the years or flexible loans that may have fallen behind payment schedule at any time.Alternatively it may be that you just want your family to have some extra cash over and above what you owe in the event of your death.
As the sum assured remains consistent, the premiums for level term cover are considerably higher than for decreasing term.
Compare Life Insurance
Level term cover suits people with interest-only mortgages that do not reduce over the years or flexible loans that may have fallen behind payment schedule at any time.Alternatively it may be that you just want your family to have some extra cash over and above what you owe in the event of your death.
As the sum assured remains consistent, the premiums for level term cover are considerably higher than for decreasing term.
Compare Life Insurance