Many people are so busy living their lives; they don’t stop to wonder what would happen if they died without a life insurance policy.
But if you’ve never thought about life insurance before, you really must do so today, before it’s too late.
What’s the point of life insurance?
The main reason people first consider taking out life insurance is to provide support for their family when they die.
Life insurance can be beneficial to you too, even if you don’t have any dependents. For example, how many people put aside money each month to pay for their funeral costs? Not many!
Even the most basic funeral is an expensive affair.
If you don’t have a life insurance policy for your family to fall back on, they will be left to foot the bill for your funeral service, burial, or cremation. If the cash isn’t available, your family might have to take out a loan or ask a funeral home for a payment plan, immediately plunging your loved-ones into debt.
The last thing you want is for your family to be faced with the problem of struggling to pay for your funeral while they’re still coming to terms with losing you. A life insurance policy can remove unwanted stress from your loved-ones by covering the cost of your funeral and burial.
Other final expenses
In addition to your funeral, many other financial issues will fall to your family to sort out if you don’t have a life insurance policy.
If you’re the primary breadwinner, your surviving family could be left without an income when if you die. The right life insurance policy will help to cover this.
Sometimes, family members are deeply traumatised by the death of a close relative. A good life insurance policy will cover the cost of expert counselling for your spouse and children.
What about debts?
If you don’t have life insurance and die unexpectedly, you could leave your family with the liability of paying your outstanding debts.
If you have massive debts, your home could even be at risk, potentially leaving your family having to sell the property to keep creditors at bay.
Simply by taking out a life insurance policy, you could put your mind at ease.
So, what types of life insurance are there?
A term assurance policy provides the assured with cover for a fixed term. The sum assured is only payable upon the death of the policyholder, and there are no investment benefits or pay-outs on survival.
Term assurance policies may be written on a single life, joint life (first or second death), or on a life-of-another basis. If you take out a life-of-another policy, you must be able to demonstrate that you have a financial interest in that person and the insurer will require proof of this before the cover is granted.
Level term assurance
In the case of level term assurance policies, premiums are fixed for the policy term, and payment will only be made if the assured dies within the policy term.
This type of policy is useful for providing security for dependents up to a certain age, for example, for your children until they reach the age of 21 when it is assumed they will be working and self-sufficient.
Decreasing term assurance
With a decreasing term assurance policy, life cover reduces during the term of the policy, the pay-out decreasing pro-rata the longer the policy is in force.
This type of policy is useful for securing the payment or reducing a debt in the event of the policyholder’s death, for example, a repayment mortgage. Decreasing term assurance is usually cheaper than level term assurance.
Whole of life assurance (WOL)
Whole of life (WOL) policies provide lifelong protection for the assured.
WOL assurance is usually more expensive than term assurance, as the insurer knows that they will have to pay out at some point during the life of the policy.
The most popular type of whole of life assurance is unit-linked. Unit-linked WOL insurance offers a combination of investment and life cover components. Premiums are generally fixed for ten years and then reviewed. The premium may be increased, or the sum assured reduced, depending upon their findings.
With-profits WOL assurance
These policies guarantee to pay the sum assured in full upon the death of the life assured.
The policyholder makes extra premium contributions to facilitate participation in the with-profits fund. The sum assured increases annually with the addition of a reversionary bonus. These bonuses permanently increase the base guaranteed sum assured, and a final (“terminal”) bonus will be paid on the death of the assured.
Unit-linked WOL assurance
With this type of policy, the life cover and investment combination is decided upon at the outset. The monthly premium is used to purchase units in a particular fund at an offer price.
Each month, the insurer calculates the life assurance costs for the following month and deducts this by using accumulated units to pay for the cover. Thus the policy grows and depending upon market conditions, the value of each unit also increases.
The growth of the investment is dependent upon the fund’s performance and the life cover element deductions. Optional benefits such as critical illness cover may also be deducted.
This type of policy attracts initial set-up charges, which are recouped through low allocation to investment units or the creation of special initial units. The premium is reviewed on the 10th policy anniversary and adjusted at this point, depending upon the level of unit growth.
Universal WOL assurance
This is a unit-linked whole of life policy with additional options. Units can be cancelled to buy life cover and can also be cancelled to pay for permanent health insurance, critical illness insurance, personal accident benefits, and hospital income benefits.
This type of policy is designed to be a one-stop-shop for all the policyholder’s requirements and offers flexibility should the assured wish to move from protection to investment as their needs change.
Dying unexpectedly without life insurance could leave your family without an income, and struggling to pay for your funeral and any outstanding debts you’ve left behind.