Life Insurance

A Beginner’s Manual To Life Insurance

This simple guide will help you understand life insurance and what you may need it for.

This simple guide will help you understand life insurance and what you may need it for. Life insurance, also known as life cover or life assurance, is a way to help protect and cover your loved ones financially if you were to pass away during the time you have life insurance. It is important to remember that life insurance is not a savings or investment product and has no cash value unless a valid claim is made. It makes sense to do research before signing up, so you can be sure you are getting the most applicable cover for you at the best value possible.

What Is Life Insurance Used For?

Before you decide you need life insurance, it is good to understand your reasons for requiring this type of insurance. Typically, life insurance is purchased if you:

  • Purchased a new home and have a large mortgage. A life insurance payout could help a partner or family to pay off the debt if you were to pass away.
  • Would like to leave a legacy. A life insurance payout could help provide surviving family and loved ones with an inheritance.
  • You have children. A life insurance policy could help with all costs associated with raising children, of any age.
  • Would like money to pay for a funeral. A policy could assist with costs related to your funeral.

How long should I take out a life insurance policy for?

There are two different types of life insurance: either fixed period (known as term) or for the rest of your life.

‘Term’ insurance pays out when the policyholder passes away within a set period of time. Most policies run for between 10 and 25 years, but you specific how long you would like the term to be. If you pass away during the term, the policy will pay out the amount agreed at the start, which is called ‘sum assured’. Some policies will also pay out if you are diagnosed with a critical (terminal) illness.

The downside of term insurance is that if you live past the policy term, there will be no payout. ‘Whole-of-life’ insurance is designed so the policy pays out a lump sum to your loved ones when you die.

How much life insurance cover should I take out?

Generally, the more protection your life insurance provides, the greater the premiums. If you are trying to find a policy which will pay off your mortgage in the event of your death, we recommend using the life insurance calculator which is provided by confused.com.

Should I change this (cover) over time?

The scale of your life insurance cover should reduce in line with your mortgage payments. This is called decreasing term insurance. Premiums are generally lower than the level term insurance, which stay fixed during the term of the policy.

What factors affect the cost of the life insurance policy?

There are several factors which can affect the cost of life insurance. In addition to the above and length of the policy, other factors include:

  • Your lifestyle
  • Your age
  • Your health
  • Your family medical history.

Dangerous professions or hobbies may also effect the amount you pay in premiums.