We all understand insurance. We pay money to an insurance company each month, and in return they pay out a much larger sum when whatever it is we have insured against occurs (subject to policy terms and conditions).
But what about life insurance? We know that it will pay out if we die (subject to policy terms and conditions), but what’s the point of that? We will not be in a position to enjoy the payout.
But of course, those we leave behind will.
Life insurance is designed to provide financial security for those you leave behind at the time they need it most. You won’t be there to appreciate it, but there is a very clear benefit to you. It means you can have peace of mind, knowing your loved ones would be provided for if you could not provide for them yourself.
For anyone with financial dependents—a spouse, children, or even aging parents—life insurance is the foundation of financial planning. It helps ensure that the standard of living your family is accustomed to does not collapse if you die.
Strangely, not everyone has the protection of life assurance. At Continuum we are looking at life insurance for beginners, and why it could be something you should be arranging without delay.
How life insurance works
Life insurance is a contract between an individual (the policyholder) and an insurance company (the insurer).
The policyholder agrees to pay a regular amount, known as a premium, to the insurer. The insurer agrees to pay a lump sum called the death benefit, to the designated individuals (the beneficiaries) on the policyholder’s death subject to policy terms and conditions.
In most cases, the death benefit is paid to the beneficiaries tax-free, meaning they receive the full amount specified in the policy. It can replace the income you would have earned, allowing your family to cover essential expenses without financial distress. Paying off the mortgage so they could keep their home, taking care of other debts to ensure they would not become a burden, and replacing your income could all be taken care of with a large enough sum insured.
Even stay-at-home parents who do not earn an income should consider life insurance. The cost of replacing their childcare, housekeeping, and home management would be a significant expense for the surviving partner.
But although the idea behind life insurance is simple, there are some variations you need to know about.
The Two Main Types of Cover
While there are many variations, life insurance policies generally fall into two broad categories:
Term insurance: Term insurance is the most common and often the most affordable type of policy. It provides cover for a fixed period – the ‘term’ – typically 10, 20, or 30 years, often chosen to coincide with retirement or paying off a mortgage.
Cover ceases at the end of the agreed term. If you outlive the term, the policy simply ends, and no payout is made.
Variations include Decreasing Term, where the payout reduces over the term, often to match the amount outstanding on a repayment mortgage, Level Term, where the payout remains the same throughout the term and Increasing Term, where the payout increases to compensate for inflation.
Life assurance vs life Insurance: The two types of life cover are also known as Life insurance and Life assurance. Life assurance provides lifelong coverage, while life insurance covers a set period. Life assurance policies are generally more expensive due to the indefinite length of coverage, while life insurance is often cheaper as it covers a specific term.
Whole of life insurance – or life assurance
Whole of Life insurance provides cover for the policyholder’s entire life. As long as premiums are paid, a payout is guaranteed (subject to policy terms and conditions), regardless of when the death occurs.
Because a payout is guaranteed as long as you continue to pay the premiums and meet the policy terms and conditions, these policies are generally more expensive than Term insurance. Some Whole of Life policies also have an investment component known as ‘cash value’ that grows over time.
It is typically used for long-term estate planning, providing an inheritance, or covering future estate tax liabilities.
So, do you need life insurance?
Life insurance could be a valuable way to help protect those who matter most to you.
Premiums are usually fixed for the duration of your cover and tend to be lower the younger you are when you start.
The most suitable policy is one that aligns the coverage amount and the term length with your family’s specific financial roadmap. To find the cover that is appropriate for you at the most competitive possible price, get an expert on your side.
Begin with a call to us at Continuum.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a particular protection product and you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate estate planning.
