Life Insurance Explained

Why bother with life insurance?

Life insurance is for those who wish to provide financial support for their families and to make sure that their property remains within the hands of their partners and/or children - life insurance provides peace of mind for the policyholder. Should the unthinkable happen, your family and loved ones will be able to support themselves financially through a life insurance payout.

The main reasons for taking out life insurance include:

• Salary replacement - ensuring the family does insure they are not burdened by financial difficulties and debts after your death.

• Mortgage and debt repayments - ensure that your family is able to keep up with repayments so that they can continue to live in your home.

• Cover for expenses - cover for healthcare plans for your family, and school/university fees for your children

• Inheritance Tax Planning - saves your family from having to find money for Inheritance Tax

• Partnership Protection - your business could be at risk if you or one of the partners passes away

There are many reasons for wanting to take out life insurance; you might not want to inconvenience your family with your debts, ensure that they can maintain their current standard of living, or protect the interests of your business. Choosing the right type of cover for your personal circumstance is essential.

Life insurance policies are typically grouped and sold as two distinct types, of which there are a number of variations and optional cover levels available. The two main types of life insurance are:

Term Insurance/Temporary Insurance

Term life insurance is called so, because it provides cover for a number of years which you can set yourself, providing cover until a time at which your dependents are in a financially able position, which is why it is also referred to as temporary insurance.

Term insurance is usually the least expensive way of providing protection for your dependants should you die, with the monthly payments generally being a lot lower. The policy guarantees to pay out a set amount if you die within the stated term, but does not pay out anything if you survive the term. The term could be, for example, the number of years left on your mortgage, or until your children are financially independent.

Term life insurance policies provide peace of mind that should something happen to the insured, his or her dependents will benefit by way of a cash payment. Term life insurance can be tied to your mortgage, a policy which ensures the security of your estate and that your partner and/or children are not left without a home - this is one of the most popular term life insurance policies available and so you should be able to get a good deal on this. These mortgage specific plans are sometimes sold as 'protection only' insurance.

Whole Life Insurance, Level Term & Investment Type

Whole life, level term, and investment type life insurance plans are more expensive than term insurance, as it provides a payout at the end of the term regardless of whether you are alive by the end of any specified term date or not, although depending on the type of policy you take, some will only pay out in the event of your death.

The difference between whole life and level term insurance is that with a whole life plan you are not limited to a specific period like you would be with term insurance; with whole life you pay premiums for the duration of your life, but with level term you stop paying premiums once you reach a specified age, usually 65. Either way, your family is guaranteed to receive a payout.

Investment type insurance can be arranged so that your monthly premiums are invested into any number of savings plans, so the policy becomes both a protection for income and saves for the future.

Payments can be invested in a number of assets such as stocks and shares, corporate and government bonds, and property. You can choose to have your money invested in one or any number of interests specified either by yourself or your insurer. The amount paid out in the end will ultimately depend on how well the investments in the insurance fund have performed.

Critical Illness Cover Explained

Critical Illness Insurance is different from the main types of life insurance in that payments are made out to the policyholder rather than their families.

Critical illness policies usually pay a tax-free lump sum if you suffer from or are diagnosed with one of the critical illnesses or conditions covered by the insurer, or undergo one of the surgical procedures for a named illness covered by the policy. Critical illness cover provides financial peace of mind in these circumstances.

On its own it is more expensive than life cover, but can often be chosen as an extra benefit on some life insurance policies. This usually means that the policy pays out if you die or suffer a critical illness. These plans generally only pay out once and then end - so they don't continue to provide life cover after a pay out for critical illness.

Critical illness cover is often, understandably, confused with other types of insurance such as income protection and private medical insurance. Critical illness cover is mainly used to protect a portion or all of a mortgage or a homeowner loan; by contrast income protection is intended to contribute towards your general monthly costs for food, bills etc., and medical insurance provides cover for the treatment of any illness.

Related Frequent Questions:

• Optional Life Insurance Extras
• Investment Options with Life Insurance