What is life insurance?


Life insurance explained

Simply put, life insurance (also known as life cover, both refer to the same thing) is a type of policy agreement or contract one can take out with a company that specialises in insurance products. If you take out life insurance cover, then you will typically have to pay premium monthly payments, and this means that a lump-sum will be paid out by the insurance provider if you were to die. This is paid directly to your beneficiaries that have been named in your contract.

In terms of the type of life insurance cover you can take out, there are many options available to you. Your policy can be customised to personally fit your needs so that you can create a policy that will adequately protect your loved ones if you were to pass away during the length of your contract. There are also two main types of life insurance categories to choose from too.

What are the life insurance categories to choose from?

Your life insurance policy cover will be paid out to any beneficiaries you have named in your agreement once you have died.

As previously mentioned above, there are two types of life insurance that you can choose from. The differences between the two are as follows:

Term life insurance

This kind of life insurance is cover that lasts for a specific amount of time, with this time frame indicated by you. This could mean you take out a policy cover lasting perhaps just 15 years, or a time period of 30 to 40 years in total. After this time period has passed, the life insurance policy has expired and is no longer valid. This type of insurance does not have any cash value either. Depending on the insurance company in question, you could pay the same price for premiums for the duration of the policy. However, some policy providers offer the option of ‘annually renewable’ term insurance, which means that as you age, the premiums increase too.

A number of people decide to go with term life insurance as it is often used up until one reaches the age of retirement. At this point, many do not necessarily need the cover provided by term life insurance, as they have accumulated enough money to cover a mortgage (which may have already been paid off by this point) or there is no longer a need to have a policy that could cover a loss of income. Or, some decide to opt for a different kind of insurance once they have reached this age, such as over 50s life insurance.

Whole life insurance

As the name of this policy covers suggests, this kind of life insurance agreement will cover you for the rest of your life, from the moment that you take out the contract, up until you die. For the duration of the policy, you will pay the same premium on a monthly basis.

Whichever policy type you choose you also have the option of which kind of cover you can opt for.

What are the types of covers for life insurance?

There are three kinds of cover you can choose from when it comes to life insurance:

  • Level cover: this is when the amount paid out remains completely the same
  • Decreasing cover: with this category, the amount will decrease over time
  • Increasing cover: the amount paid out will be in instalments that increase over the course of time

Generally speaking, the majority of life insurance providers will provide a policy that means once you die, just one lump sum amount is provided to your beneficiaries. If you are interested in the idea of decreasing or increasing cover, then it is best to shop around and check the terms and conditions of the insurance company you are interested in taking out cover with, as these typically aren’t the most popular life insurance cover categories.

Can I add extra cover to my life insurance policy?

Yes, but once again, this depends on the life insurance provider. You may have any of the following additional cover packages stated below, which could be included within your current life insurance, or you have to pay a small amount extra each month. The extra cover you could add includes:

  • Life event changes: this kind of cover protects you in the event of an unexpected change in circumstances
  • Terminal illness cover: if you find yourself in the situation where you are diagnosed with a terminal illness
  • Critical illness: this additional type of cover protects you if you are diagnosed with a critical illness.

Is my family protected by my life insurance policy?

In most cases, your family will not be protected by your individual life insurance policy. However, it is possible to obtain a group policy with many insurance providers, meaning that you can get life insurance cover that protects your entire family.

It is important to note that if members of your family are named as beneficiaries on your life insurance agreement, then they will be the recipient of any money claimed when you die.

How much will my beneficiaries receive from my life insurance policy?

The exact amount that your beneficiaries will receive from your life insurance policy will be dependent on a number of factors. This includes the kind of policy that you have purchased in the first place, as well as the kind of cover you choose (e.g. whether it decreases or increases over time once a claim has been made).

I am a smoker, will my life insurance cover cost more?

You will find that with most life insurance policy providers, you will have to pay extra if you are a smoker.

Yes, it is likely that this will be the case, due to the number of health risks that are entailed when it comes to smoking. It can increase the risk of many serious medical conditions, such as heart disease or cancer. Consequently, you can expect that your life insurance policy could end up costing you considerably more. According to a recent study conducted by MoneySupermarket, the average smoker pays roughly 61% extra per month.

If you are a smoker, do not attempt to lie about it in your contract. If they suspect you are a smoker and you haven’t stated that you are, it could end up making your policy invalid, and they may ask for tests to prove you aren’t one.