People die. It is a fact of life. However, how those left behind cope with death is something each of us needs to think about now, while we have the ability to make some important decisions. One of those decisions is purchasing proper life insurance. Without life insurance in place, we could be leaving our loved ones in a difficult financial position upon our passing.
Life insurance is such a small matter in comparison to some of the other things we deal with; it's no wonder so few people have it. Yet it becomes monumentally important upon the passing of an individual. If you are not ready for that event, keep reading to learn all the information you need to know about life insurance. Then make it a point to purchase a policy as soon as you can.
Life Insurance Basics
In simplest terms, life insurance is a contract between the customer and the insurance provider guaranteeing a cash payout to the beneficiaries of the customer upon his or her death. It's strange that we use the term "life insurance" given the fact that the human life is not protected. Nonetheless, it is what it is.
There are many different types of life insurance products all falling under one of three main categories. According to Barclays those categories are:
- Term Life Insurance - Term life insurance is a policy that works very similar to car or home insurance. As long as you keep your premium payments up-to-date, your beneficiaries will be eligible to file a claim upon your passing. The distinction here is in the definition of the word "term." A term policy is usually good for 15 or 20 years; if you die within that term the policy pays out. If you live beyond the 20-year term, your policy will expire and you will have to purchase a new one.
- Whole Life Insurance - Whole life insurance is a bit more expensive than term insurance because it covers you from the time you purchase the policy until you die, regardless of when your death is. Obviously, the policy can be cancelled if you fail to make your payments, but other than that, it remains intact throughout your entire life. Most whole policies only require payments for the first 20 years or so, after which the policy is paid in full.
- Investment (Annuity) Life Insurance - Customers wishing to use life insurance policies as an investment vehicle can purchase several different types of products. Annuities are just one example. The investment products still pay upon the passing of the owner, but the amount of the payout is tied directly to the performance of the investments.
Of the three, the most common type of life insurance is the term product. It is the least expensive, easiest to qualify for, and the least complicated of the three. The one disadvantage of the term policy is its eventual expiration. For someone in their 20s or early 30s the lifetime cost of successive term policies, should they live to be 75 or 80, could be more than they want to pay.
Details of Term Life Insurance
When you choose term life insurance there are some additional things you need to consider. Term life insurance comes in several different shapes and sizes to meet a variety of circumstances. Among the first things that need to be decided is whether you want a lump sum payout or long-term income.
The lump sum payout is the more common of the two. As the name implies it pays out the total value of the policy in a single payment to your beneficiaries. This type of cover is most often used to defray the cost of a funeral, pay off any debt left behind, and provide at least a little money for those left behind to get back on their feet.
The long-term income option is also known as the "family benefit" option. It provides a steady stream of income to the beneficiary so he or she does not have to worry about getting right back to work after the policyholder's death. This option is great for younger men with families.
As far as terms and premiums are concerned, UK residents typically have three options:
- standard term - also known as "level term", this is a policy where the amount of cover and the monthly payment remains static throughout the life of the policy
- graduating term - with this option your premiums and policy value increase over time
- decreasing term- this is the opposite of graduating term; your premiums and policy value decrease over time
The best type of term life insurance policy for any individual is dictated by circumstances and goals. It is important for those who do not understand the pros and cons of each to consult with an insurance expert before purchasing a policy. Better to take enough time to make the right decision then to settle on a policy that ends up being an improper fit.
Whole Life and Investment Policies
Although it is easy to provide details of term life policies, the same cannot be said about whole or investment policies. When it comes to whole life insurance and investment vehicles, there are so many options and so many vast differences between them that it is difficult to say anything concrete or specific.
What we can tell you is that both options rely on the investment of your premiums in order to make a payout upon your passing. Whole life policies are more secure in that they guarantee the agreed-upon payout regardless of how your investments do. The downside to the whole policy is that it is more expensive in order to cover the risk of the insurance provider.
Investment type life insurance is attractive in the sense that it could result in a huge payout should you live long enough and your investments prosper. However, it is also the most risky of the three life insurance options. You may purchase an investment type life insurance vehicle with dreams of a huge cash payout 30 years down the road, only for your family to find out upon your passing the policy has nowhere near that value.
Factors That Affect Premium Price
Unless you are applying for a special life insurance policy with no conditions attached, your insurance company will look at a number of different factors in determining your monthly premiums. Like auto or home insurance, these factors all play into the amount of risk the insurance company is taking by writing a policy for you. A guide to life insurance published by the Telegraph list some of the factors life insurance companies look at including:
- age and sex of the insured
- whether or not the insured uses tobacco and alcohol
- overall health and medical history of insured
- occupation of the insured
- type of cover being applied for
- lump sum or long-term income options
- total amount of the payout
It stands to reason that an individual in poor health will represent a higher risk than someone who is in excellent health. Their monthly payments will differ accordingly. The same can be said regarding those who practice risky behaviour such as smoking, drug use, and so on.
When you look around for life insurance policies, you do have some leeway in making adjustments to control your premiums. That should be part of the shopping process. For example, if you need to lower monthly premiums to make them affordable you can always reduce the term or accept a smaller lump sum payment. You can discuss many different options with your insurance advisor.
Determining How Much Life Insurance You Need
To believe the typical insurance you would think everyone needs millions of pounds of life insurance. The truth is we do not. However, determining exactly how much you need is a matter of assessing where you are financially, and how much protection you want to provide to your beneficiaries.
Experts recommend individuals start by determining their current financial situation and what it costs for them to live month-to-month. This would include tallying up the monthly mortgage or rent, how much is spent for food, the cost of utilities, and any outstanding loans and credit cards.
To that total one should add the average cost of a funeral and burial as well as other associated costs. Finally, one should consider whether he or she wants to leave additional income to beneficiaries to replace what they have lost from their work or pension. The final calculation provides a starting figure (in terms of payout) that can be adjusted accordingly.
Unfortunately, if you are looking for a simple answer you will not find one. Life insurance is a very personal thing that is truly different for every individual. At the very least, consider providing enough cover to pay for funeral and burial expenses so that you do not burden your loved ones with that.
It has been said that there are only two things in life that are guaranteed: death and taxes. Knowing that your passing is inevitable, it makes good sense to have an appropriate level of life insurance in place right away. After all, none of us knows when our time will be upon us. Now is the time to make sure you love your loved ones after you pass by providing life insurance for them.
The UK is fortunate to have plenty of financial institutions offering quality life insurance products. Here are links to some websites where you can purchase life insurance directly from the provider:
Aviva - Aviva is one of the UK's leading names in insurance and financial services. They provide online quotes, a life insurance calculator, and live representatives willing to talk with you over the phone.
Standard Life - A life insurance specialist with options for young policyholders as well as those over age 50. When you quote and purchase hear you receive a free gift of £30 in M&S vouchers.
Post Office - The Post Office offers term life insurance policies up to £500,000. They have several different options that are very affordable for most UK residents.
Are you looking for a fast and easy way to get several life insurance quotes from multiple companies? Check out these links from some of the UK's most well-known comparison websites:
Go Compare - Compare policies and prices for individuals ranging from age 18 to 80. They also provide toll-free number you can call for expert advice.
Money Supermarket - Offering online quotes from well-known UK providers at prices starting at just £5 per month. They also offer a comprehensive life insurance guide for free.
Confused.com - Options from 11 different providers are found here. When you quote and buy online, you also earn 5,000 Nectar points.
Compare the Market - Site offering online quotes for multiple types of insurance products, including life insurance. When you purchase your life insurance, you can add to your meerkat toy collection.
Tesco Compare - Get quotes through their partner site, Idol.com. While you are visiting this site, take advantage of their library of information regarding life insurance and how it works.
uSwitch.com - A site offering prices as low as £5 per month on term insurance. Here you can get quotes from multiple providers across the UK.
Money.co.uk - Offers comparisons on more than 145 life insurance products. This site works with well-known companies like Sainsbury's and John Lewis.
Money Saving Expert - Unsure of how life insurance works? This site provides all the information you need to know as well as helpful advice regarding how you should go about purchasing life insurance.