Life insurance basics

  • If you need the lowdown on the fundamentals of life insurance you can find simple answers to the most frequently asked questions below. Just click on a question to reveal the answer.

Life insurance basics quick facts:

  • Life insurance is an important thing to consider for anyone with dependent family members who rely on them financially.

  • There is a wide range of different policies that allow policyholders to tailor cover to suit their specific circumstances and needs

  • A policyholder's age, health, preferred term and cover amount are all key to working out how much a life insurance policy will cost.

  • Older people or those with dangerous hobbies, existing health problems and smokers will find that they may struggle to find a cheap life insurance policy

  • Although joint policies are often cheaper, they may only pay out once and could leave a surviving partner with no cover. Two single policies will cost more but can be more suitable for couples with a wider gap between ages or incomes

Do I need life insurance?

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If you have children or anyone else who would suffer financially in the event of your untimely death, then the answer is probably 'yes'. Nobody really likes to think about their death or that of a loved one, but it's relatively simple and affordable to obtain life insurance, which will provide you and your family with financial security.

Deciding whether you need life cover and what level of cover you need is very personal to each household. Some families are reliant on two incomes, while others have one main bread-winner. There is a large range of life insurance products to choose from, ensuring that the right solution can be found for any household.


How much does life insurance cost?

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The cost of your life insurance premiums is calculated based on a variety of lifestyle, health and policy factors. Your occupation, health and age are all taken into account, as well as the length and value of your policy.

Overall, the cost of life insurance has fallen in recent years, meaning it is an affordable option for most households. This is particularly true if the policyholders are in good health and lead low-risk lifestyles.


How does a life insurance calculator work?

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When considering life insurance for the first time, online calculators can be a useful way to establish how much money your family would need to continue their lifestyle should the worst happen to you or your spouse.

Calculators ask you a range of simple questions about your family, lifestyle, income and outgoings. They then offer suggestions for the amount of cover you may need and allow you to balance your requirements with affordability.


Is cheap life insurance always the best option?

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The most important thing is to make sure you opt for a policy that will pay out the right amount of cover for your family, should you die. The lower your payout, the cheaper your life insurance will be, but if that means your loved ones are left with too little to pay off debts and cover expenses, your level of cover is inadequate.

If you have dangerous hobbies, such as mountaineering or flying; or if you are a smoker, or suffer from poor health, cheap life insurance may not be available to you. However, it is always worth shopping around for a good quote, and you may even be able to find a cheaper policy to the one you took out several years ago, as premiums have fallen in recent years.


What health factors affect life insurance?

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Your health has an enormous bearing on the cost of your life insurance. Smoking is perhaps the most common lifestyle factor that can result in increased life insurance costs. You will pay less for cover if you are a non-smoker and if you are a smoker when you take out a policy, you will have to have given up all cigarettes and nicotine replacements for a full year before your premiums come down.

Other health factors, such as weight, stress levels and illness can affect the cost of your life insurance. When you apply for your policy, you will be asked a series of questions about your health and lifestyle, and your premiums will be calculated from your answers.

You won't usually need to undergo a medical examination, but it is important to be honest about any unhealthy habits or poor medical history when you apply. Any inaccuracies are likely to be discovered after your death, which could leave your policy worthless.


What should I consider when comparing life insurance?

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Cost is obviously one factor to consider, and there are several variables that will affect this. However, there are several other factors that are equally important, such as the type of policy offered, the way the cash sum is paid out to your dependants in the event of your death and whether the premium amount is guaranteed for the life of the policy, or if it is reviewable.

You may also want to consider whether you can skip payments when necessary, while remaining covered and it is worth double checking whether you can cancel the policy. Some policies will also offer a cash-in value, so if that's something that appeals to you, this is worth considering.


How long will I need my policy to run?

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If you are opting for a 'term' life insurance policy, it's important to give plenty of thought to the length of your policy before taking out life insurance. Think about the age of your children and spouse and how long it will be before they are financially independent. The amount of time left on your mortgage is another vital element to consider when deciding the length of a term policy.

Whatever term you decide, your policy will pay out only if you die within the designated period. If you opt for a whole of life policy, it will pay out when you die, regardless of your age.


What level of life insurance cover do I require?

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This is perhaps the most important question you need to ask yourself when taking out life insurance for the first time. Fundamental costs that your family will incur in the event of your death include funeral expenses, debt repayments, mortgage repayments, monthly bills and education costs. Think about the costs involved in sending your children to university should they take that option or for school fees if they attend, or hope to attend, a fee-paying school.

However, it's not just these fundamentals that need to be taken into account. You need to consider your current lifestyle and ensure that your life insurance payout amount will enable your loved ones to continue to enjoy life, in the way in which they are accustomed, after your death. Leaving your spouse and children with the bare minimum they need to get by isn't ideal, so calculate your cover accordingly. Life insurance calculators can help you to put a figure on your cover requirements.


Should I take out a single or a joint policy?

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If you are part of a couple, you can opt for a single life insurance policy, a joint life insurance policy, or two separate single life insurance policies. There are advantages and disadvantages to each option. Although a joint policy is usually cheaper than two single policies, it will only pay out once - usually when the first partner dies. This means that the the remaining partner may find themselves without life insurance at all after the event of their partner's death. They then may want to take out a single policy and find their premiums are higher as they are now older.

Two single policies, although sometimes more costly, can be a better option if you and your partner are very different ages or one of you is in much better health than the other. Two single policies also means that, if you and your partner die at the same time, your family will receive two payouts, rather than a single payout from a joint policy.


Mortgages and life insurance

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Many mortgage companies will require that you take out life insurance in order to qualify for your mortgage. Mortgage companies will often offer you life insurance when you take out your loan, but the premiums may be much higher than some of the best deals you could find independently.

If your life insurance is primarily to cover the cost of paying off your mortgage should you die, term life insurance set to the remaining term on your mortgage is an attractive option. It's important to compare these types of mortgage as some have payouts that reduce over the term of the policy. These policies tend to cost less than level-term insurance.


Will my family pay inheritance tax on my life insurance payout?

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The payout your family receives from your life insurance policy could be added to your estate for inheritance tax purposes. It is perfectly legal, however, for your life insurance payout to be 'written in trust', which will ensure it is not included in your estate when you die. In fact, some people take out life insurance specifically to cover their family's expected inheritance tax bill.

The current inheritance tax-free allowance is £325,000 per person, with tax usually payable at 40 per cent on anything over this amount.


Do women pay less for their life insurance than men?

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As of December 2012, insurers are no longer allowed to take gender into account when working out life insurance premiums. Until this date, when European legislation was introduced, women were able to obtain cheaper life insurance than men, simply because women have a longer life expectancy on average.


Do I need to read the small print?

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It's vital to take the time to read the small print in any policy you're taking out to ensure that you won't be excluded for any reason. Some policies won't cover individuals with certain existing illnesses or conditions, for example. If you die from alcohol or drug-taking or from an accident caused by a particularly risky hobby, you might also not be covered. Most policies will include these exclusions in the terms and conditions or in the 'Key Features' section of the paperwork.


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