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Life Insurance 101

Life insurance could prove to be the most important financial products you ever buy.

If you die while you still have dependents (Your partner and/or children), being able to claim on a life insurance policy could mean the difference between your loved ones struggling to make ends meet, and their being financially secure.

Most of us have enough money worries in our everyday lives without also having to think about what will happen in the event of our death, and who wants to think about death anyway?

However, if you don’t consider what your dependants would do without your income, you could end up leaving them high and dry financially at what is already likely to be a very stressful and emotional time.

Even if you don’t work – you might be a stay-at-home parent, for example – the cover could still prove invaluable, as the chances are childcare and other housekeeping costs would need to be paid for if you were no longer around.

There are several different kinds of life insurance policy to choose from, and your broker will look to recommend the absolute best for your specific circumstances.

It’s important to understand exactly what’s available before buying. This Create Finance guide will explain how the various kinds of plan work, so you can make an informed choice on whether the policies we suggest are right for you.

Term insurance

‘Term’ insurance pays out when the policyholder dies within a set period of time. Most policies run for between 10 or 25 years, but you can specify how long you want the term to be.

If you die during the term, the policy will pay out the amount agreed at the start, which is known as the ‘sum assured.’

If you live beyond the term of the policy, the cover simply terminates – there is no investment element or any return of premiums.

Your broker will typically look at different types of ‘terms’ for your insurance:

With level term insurance, the amount of cover – the ‘sum assured’ – is the same in the final year of your policy as it is in the first.

If you have decreasing term insurance, the potential pay-out will reduce over the term.

This sort of cover is often taken out by people to back a repayment mortgage, with the sum assured shrinking along with the outstanding mortgage debt. The cost is less than for level term cover.

How long will I need life cover for?

When working out how long you need life cover for, there are several factors your broker will take into consideration.

First, they will consider any debts you have, starting with your mortgage, then credit cards and any personal loans. These will need to be paid off when you die, so they will look at your current repayment terms.

Alternatively, you might want to take out cover for longer than this, so that you leave a lump sum when you die once your mortgage is paid off.

It’s also vital to think about how any dependants will be provided for if you are no longer there. If you have young children, for example, it’s a good idea to take out cover that will last until they become financially independent.

How much cover do I need?

Once it has been established what sort of financial support your dependants would need if you were no longer there, your broker will look at whether you already have any life cover in place.

Many employers include what is known as ‘death-in-service’ benefit, which will pay out a lump sum if you die. Typically, this is worth around four times’ your salary, but it’s worth checking your contract so you know exactly how much cover you have in place.

Your broker will ensure that your mortgage and any other debts earmarked as in need of repayment upon death are covered, which my mean they suggest a smaller life insurance policy that ‘tops up’ your benefit.

Bear in mind, too, that if you change jobs, your new employer may not offer the same level of cover, so you may prefer to arrange your own life policy so that you have continuous protection in place.

Remember that the older you are when you take out cover, the more expensive it will be, so don’t leave sorting out cover until later in life, when premiums could be unaffordable for the amount of cover you require.

Guaranteed or reviewable premiums?

When buying cover, your premiums (the amount you pay per month) can be ‘reviewable’ or ‘guaranteed’.

If they are guaranteed, this means they won’t change over time, giving you certainty when budgeting. However, if you opt for reviewable premiums, then these could change over time, and might rise if your circumstances change.

Guaranteed premiums are likely to be more expensive at the outset, but this kind of policy could prove more cost-efficient in the long-term, as premiums cannot rise over time. Your broker will consider your budget and circumstances when suggesting the type of premium.

Joint or single life cover – which is better?

It’s natural for couples to think it’s better to take out a joint policy, but this might not be the case.

For a start, a joint policy is not significantly cheaper than two separate single life policies. But more importantly, a joint policy only pays out once on the first death, leaving the second person without cover.

Since they are likely to be older by this time, it will be costlier for them to buy insurance for themselves at that later date.

By buying two single life policies means you have more flexibility.

Your broker may recommend insuring yourselves for different amounts, depending on your incomes, and cover for different lengths of time.

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