What is Life Insurance?
If you die, your family could be left struggling financially. Life insurance is there to help make sure that doesn’t happen. It’s an insurance policy that is designed to pay out a lump sum to help support your loved ones, and helping to give you peace of mind they’re financially protected if the worst happens.
Definition of life insurance
Life insurance is an insurance policy that can pay out a lump sum if you die. You pay a monthly premium to be covered and the lump sum can be paid out if you die during your policy term – or, in some cases, if you’re diagnosed with a terminal illness and given less than a year to live.
How does life insurance work?
Put simply, you pay a monthly insurance premium to be covered and a lump sum can be paid out if you die within the term you are insured for. With term life insurance, you choose how much cover you want (i.e. how much it would pay out if you die), what
kind of policy you want (e.g. level, decreasing, increasing or indexing), and how long you want to be covered for (known as the policy term). The type of policy you choose determines how the policy pays out:
- Level Term: Offers a fixed payout, with both the payout and premium staying the same throughout the length of the policy.
- Decreasing Term: Offers a payout that reduces over the term, to match a decreasing debt like a repayment mortgage. Mortgage cover is often cheaper than level cover, but can leave a gap for family cover needs.
- Increasing Term: Offers a payout that grows over time, to keep up with inflation. Premiums also rise, making it a more expensive choice.
What happens if you don’t die?
Life insurance can be there to cover you in case the worst happens. If the worst doesn’t happen and you don’t die whilst you hold the policy, you won’t receive the lump sum payout.
What’s the lump sum payout for?
The lump sum that life insurance can pay out can be used to support the people you leave behind, helping to give you peace of mind that they’d be financially secure without you. Lots of people use the money to:
- Pay off the mortgage
- Help cover rent payments
- Help raise children
- Pay for your funeral
- Cover guardianship costs
- Leave a lump sum for school or university fees
Most people get enough cover to help make sure their loved ones could always cover their current commitments, to help ensure they would not financially struggle without them. You may choose extra cover if you would like your loved ones to have some extra money to use for holidays, hobbies etc.
The level of cover you choose depends on what you need, as well as how much you can afford and are happy to spend monthly on being covered.
Who needs life insurance?
The simple answer is in most cases: anyone with financial dependents. If you’ve got other people who’d be financially affected by you dying, it can be a good idea to have some life insurance cover in place to protect them. Often this means people with a partner or children, and joint financial commitments.
Life insurance can also be a way of covering debts (most commonly, a mortgage, but sometimes smaller debts like car finance or personal loans) – helping to make sure no-one else is left liable for them if you die.
What can effect your life insurance premiums?
- Health – If you are in good health, you will typically pay a lower premium compared to those with a pre-existing health condition.
- Age – The sooner you take out life insurance coverage, the cheaper your insurance tends to be.
- Coverage Amount – The higher the coverage of a life insurance policy, it will generally cost more. This will be the amount paid out to your beneficiaries after death.
- Lifestyle and occupation – If you have a risky job or have a higher-risk hobby, such as extreme sports, you might have to pay a higher premium. This is the same as lifestyle choices such as being a smoker.
Typically, the younger and healthier you are, the lower your monthly premiums will be, whilst smokers or those with pre-existing health conditions may pay a higher monthly premium for a life insurance policy.
How much does life insurance cost?
The price of life insurance tends to be different per person. This is because it usually depends on:
- Health and lifestyle: including factors like your age, individual and family health history, smoking status, extreme hobbies, etc.
- The cover you choose: including the amount, the type of policy, how long you want to be insured for, and any other additional policy features you wish to include.
Polly Summary
Life insurance is an insurance policy that can pay out a lump sum if you die. It’s often an affordable way to help make sure your family would be financially secure if you were no longer around. Our aim is to make it easy to get the right life insurance cover in place based on your needs and budget.
