What is life insurance?
Life insurance is a type of insurance policy that will pay out a lump sum to your beneficiaries, such as your children or partner, upon your death. This money can then be used to support them, such as with living costs, your mortgage or funeral expenses.
You will be able to choose the amount of cover you need and how long you need it to last for. You can then take out a single life policy or a joint life policy.
Why would you take out life insurance?
There are several main reasons why someone may take out a life insurance policy, although taking out a policy is not limited to these reasons:
- Financial protection for loved ones – for many, this will be the main reason. Providing financial protection to your family if you were to die can be crucial, especially if they are dependants and rely on your financial stability.
- Debt repayment – if you have outstanding finances, like a mortgage for example, a life insurance plan can help to take the burden off your family or dependants.
- Business continuity – for business owners a life insurance payout could be crucial to keep their business running if they were to die.
No matter what the reason for taking out a policy, it will give you extra peace of mind that once you are gone the people around you can be supported.
If you want to discuss the most suitable policy for your specific needs, why not get in touch today? Our team of expert advisors are on hand to discuss your circumstances and find you the right product.
At IMC Mortgage Brokers, we are experts in assessing these factors to find you the most competitive and suitable policy for your needs.
How does life insurance work?
Life insurance works in the same way as many other insurance policy types. You will first pay regular premiums to your insurer, which are usually monthly payments. If you were to die whilst your policy is active, your beneficiaries would then need to contact your insurance company to make a monetary claim for the amount of benefit you chose to cover yourself for.
From here they will need to provide a range of documentation for the claim to be processed. This can include:
- Your policy number
- A copy of your death certificate
- Their proof of identify, usually a driving license or passport
- Policy documents
- In certain circumstances, medical records or further evidence may be required
As well as providing these documents, the beneficiaries will need to fill out a claim form, that will need to be submitted back to the insurer. This will cover things like the details of the policy, information on the deceased and beneficiaries.
Once the insurer is satisfied with documents and form you have submitted, they will then review the claim. This process can take time, but it is relatively straightforward.
If the claim is the approved, the insurance company will then make a tax-free payout to your designated beneficiaries. Depending on the policy agreements, this could be a lump sum payment, or it could be through instalments.
What are the different types of life insurance?
There are a range of life insurance policies available, so ensuring you take out the right plan is crucial. Consulting the expertise of a broker can be invaluable and ensure you make the right decision for you and your family.
Level term policies provide a fixed payout when you die, regardless of when during the term of the policy a claim is made, the benefit amount paid out will remain the same.
These products usually have a coverage period that can range between an applicant’s 18th birthday right until the age of 90. This differs between different insurers and there are normally restrictions as to the maximum age you can be at the time of application. It is always best to check with an expert adviser.
Compared to a whole of life policy, the premiums can be cheaper. However, if compared to something like a decreasing term policy, costs will be higher. This is because the premium price stays the same throughout.
Typically, these policies can be very beneficial to those who have a mortgage on an interest-only basis, like a Buy-to-Let property. This is because your mortgage balance on an interest only mortgage typically remains the same throughout the mortgage term, exactly like the benefit amount covered on a level term insurance policy.
This means it can be easy to determine how much money you need the policy to cover to pay off the mortgage if you were to die.
Unlike a level term policy, the amount your dependants are paid if you have a decreasing term life insurance policy will reduce over time.
It will depend on how much cover you set up from the outset and how long you choose your overall policy term for. For example, if you were to die 5 years after taking out a policy, your dependants may receive £100,000. However, if you were to die after 10 years, they may only receive £75,000.
The benefit of these products is that premiums are typically lower than those for level term policies, as over time the amount an insurer will have to pay decreases.
It’s common for an individual to take out a policy and align it with an ongoing decreasing debt, with the most common type being a mortgage. This is because as the mortgage decreases over time, so will the cover payout amount.
This means if you were to die, the policy will be able to cover the remaining loan amount, with the potential for some money being left over after.
Joint life insurance policies are designed for two partners that want to insure each other, and their dependants, are covered if one of them was to pass away.
If one of the two people were to die, the policy would then payout. However, remember that once the policy is claimed against, the other person will not be covered anymore. If they wish to, they will need to take out a new life insurance policy to cover them.
These policies offer the option for both individuals to contribute to the policy, which can make it cheaper than if you were to both take out separate single life insurance policies. Additionally, certain policies allow you to convert to individual policies if required.
You should always check the implications of your policy with the insurer before you go ahead with anything.
While joint life insurance can be a convenient and cost-effective option, it’s important to consider your individual circumstances and financial goals. Consulting with a financial advisor or insurance agent can help you determine if joint life insurance is the right choice for you.
Whole life insurance policies cover you up until you die instead of just for a set period, so your policy is guaranteed to pay out.
With whole life policies you can choose between fixed or reviewable premium terms.
A fixed premium is one that will not change for the length of your policy, which can make it easy to manage your finances. The opposite is a reviewable policy, where your circumstances will be reviewed after a set number of years and the price of your policy can change.
It’s likely that your premium will increase, as you would be older than when you applied for your previous policy. Furthermore, any new health issues would have to be declared.
Typically, these policies are more expensive than decreasing term policies, as the policy is guaranteed to pay out. Keep in mind what you want from a policy and your circumstances will very much influence the premium cost.
Will my premiums change throughout the term of my policy?
When setting up a life insurance policy you can choose between having your premiums fixed for the whole term; this is known as guaranteed premiums, or a premium that changes during the policy term; this is known as reviewable premiums.
From the outset, a guaranteed premium will usually be more expensive than a reviewable premium as the insurer will guarantee your premium will remain the same throughout the term of your policy, while a reviewable premium will typically remain the same for the first 5 years and then it is reviewed every year thereafter.
After a number of years, a reviewable premium can become more expensive than a guaranteed premium, so it is important to explore your options with an expert before making any decisions.
If you are unsure, then why not give our expert insurance brokers a call so they can go through your options in more detail and based on your individual circumstances.
How much does life insurance cost?
As everyone’s circumstances are different and all insurers will assess you in different ways, it’s not as easy as giving you a rough ballpark figure of what to expect. Instead, we can discuss the factors that will influence the cost of your policy:
- Your age – the older you are the more costly a policy is likely to be, as there is a higher risk of death.
- Your health – insurers will want to know if you have had any previous medical issues or if you smoke. Again, it’s all about risk, so if you smoke or used to smoke its likely to increase the cost of your premium.
- Policy type and amount of cover – the more comprehensive the cover you want, the more costly your monthly payments will be.
- Your job – some jobs can fall into a ‘high-risk’ category, for example an agricultural worker or fisherman. If your job is seen as high-risk, the cost of your premium can increase.
What information do you need to get a life insurance quote?
When looking to obtain a quote you will usually need to provide an insurer with the following:
- Your full name and date of birth
- Your current home address
- Your occupation
- How much cover you want
- If you have any existing medical issues or if you currently smoke or used to smoke
Finding the right policy can be tough, especially with the numerous amounts of insurers on the market. Therefore, working with an expert, like us at IMC Mortgage Brokers, can prove invaluable.
We will be able to assess your situation and use our industry knowledge to pair you with the most suitable insurer and product, to ensure you are met with the most suitable deal.
Critical illness cover and life insurance
Certain life insurance policies allow you to link a critical illness cover product with it. Critical illness cover will usually be an add-on that your insurer will offer you when you take out a life insurance policy.
Adding the cover onto your life insurance policy can prove very cost-effective, compared to taking separate policies.
Critical illness cover acts as a financial safety net, providing a tax-free lump sum to help you navigate the challenges of a serious illness, covering expenses like mortgage payments, rent, debt, or even necessary home modifications.
When adding a critical illness cover to your life insurance policy you can choose how much cover you would like to add. This does not have to match the amount of life cover you are setting up.
For example, you can have a policy that has £150,000 overall cover to payout in the event of a death claim, and this can be combined with a £50,000 critical illness cover. This type of policy is called a combined life and critical illness policy.
In the above example of a combined life and critical illness policy, it will pay out £50,000 in the event of a critical illness claim and then the policy will revert to having £100,000 remaining which will then payout in the subsequent event of a death claim.
If a policy holder were to die before getting a critical illness, then the policy will payout £150,000 and the policy will cease to exist.
If you decide that you do not want a critical illness claim to affect your life insurance policy then it may be more suitable for you to take out separate life insurance policy and a separate critical illness policy. This option will not be as cost effective and will typically cost you more.
Understanding your life insurance policy: FAQs
One of the main differences between the two is the length of cover offered by policies. With life assurance, the policy will last your whole life. Therefore, you are guaranteed to be paid out. However, with life insurance, policies only last a set amount of time. Therefore, you will only be paid out if you die whilst your policy is still active.
Due to this, life assurance policies are more expensive than life insurance. However, as life assurance doesn’t require you to change your policy once it expires, it can still work out cost effective in the long run.
One final difference between the two is that some life assurance policies offer an investment option which life insurance policies don’t. These types of products are known as ‘unit linked’ and they allow you to allocate some of your premium towards the insurance coverage and the rest is invested.
Cancelling a life insurance policy works in a very similar way to any other type of insurance policy. You need to contact your insurer and let them know why you want to cancel.
You usually won’t have to pay a cancellation fee, but always check this before agreeing on a policy. You won’t receive a refund for any paid premiums.
Certain insurers may offer a refund if you wish to cancel within the first 30 days, however this will vary. Always check the fine print before committing to a policy.
