What is life insurance?
Life insurance is an umbrella term for a range of different policies, all designed to provide a financial 'safety net' should you die or become seriously ill. It could pay a cash lump sum to your dependants in the event of your death, or provide personal cover that pays out on diagnosis of critical illness, enabling you to maintain your monthly commitments while you're not working.
Many people only consider life insurance when they take on a mortgage or start a family and want the reassurance that they are covered should the worst happen. With so many different types of policy available, it's wise to make sure you know how much cover you require and the type of insurance you need before committing to anything.
How much life insurance?
To calculate the amount of insurance you require, you'll need to know what you intend to cover and for how long - plus the monthly premium you want to pay. Obviously the more cover you have the higher the payout will be, but factors such as the type of life insurance, the length of time you want it for, your age, sex and state of health will all determine which life insurance solution is right for you.
If you've a mortgage and dependants your first priority will be to cover the repayments using either a level-term or decreasing-term life insurance policy. Although this sounds complicated, put simply, a level term policy offers a fixed payout regardless of when the claim is made. However, if you want to cover a repayment mortgage then a decreasing-term policy may be preferable, as the potential payout decreases over time - but your monthly payments should be cheaper. Bear in mind that all payouts depend on whether you have met the terms and conditions of the policy.
When a family loses its main breadwinner they may need help with other commitments too; your policy could clear debts, provide for childcare costs so your partner can work or contribute to education fees with a cash lump sum. Other things to consider include 'add-on' benefits such as critical illness that pays out when you're too ill to work and can cost only a few pounds more a month
Cheapest isn't necessarily best.
With something as important as life insurance, it's a good idea to devote some time to thinking about the 'worst case scenario' and working out how much protection you can afford. An insurance agent will explain different policies in detail and get quotes for comparison, based on your needs. Above all, make sure you choose a policy with the right amount of protection you require - and not just the cheapest monthly premium.
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Related resources
- What is life assurance?
- Compare life insurance quotes
- What are the benefits of life insurance?
- Is life insurance a good idea?
- Decreasing term life assurance: how does it work?
- What is joint life insurance?
Tags: life insurance, insurance, critical illness, mortgage, level term, decreasing term