What is life insurance?
Life insurance policies protect your family financially should you die. Broadly speaking there are two types of life insurance policy; term life insurance and whole-of-life insurance.
- Term life insurance will cover you for a fixed period with most people agreeing to a decreasing term policy, where potential payout will reduce year on year with your mortgage repayments
- Whole-of-life policies will pay out when you die, meaning you are potentially paying premiums well into old age
- A third type of policy does exist called convertible term insurance, whereby you take out a fixed-term policy but are given the option to convert it to a whole-of-life policy at the end of the term without the need for any medical records.
If no one is financially dependent on you, life insurance is unncessary
Life insurance vs life assurance
A common confusion is understanding the difference between life insurance and life assurance. The difference is simply to do with the fact that life insurance could pay out and life assurance will pay out. So whole-of-life insurance is in fact assurance, whereas fixed term is a type of insurance. The terms are often used to mean either type of policy and nowadays most people simply refer to the various types of policy as life insurance.
How to keep premium costs down
There are many ways to keep the cost of your life insurance premiums down and whilst it’s important to make sure you are not over-insuring yourself by paying over the odds in monthly premiums, it’s equally important to not under insure yourself, as this could cost you a lot more in the long run. Many UK households are falling foul of this so called ‘protection gap’ and so it’s important to do your research and make sure the cover you take out is just right for you and your family.
It’s also important to take out the right kind of policy. Most parents will take out a fixed-term policy to cover their children up until the age they leave home (or they hope they will leave home anyway) or have paid down their mortgage. Arranging for this to be a decreasing-term policy could also keep costs down as you need less and less cover as you get older and your debts decrease over time.
Taking out joint cover with a partner or spouse is almost always cheaper as well. Finally, make sure you write your policy in trust so your heirs have the best chance of avoiding paying inheritance tax on any payout. You can find out more about inheritance tax here.
It's a fact: If no one is financially dependent on you, life insurance is unncessary.
How health affects premiums
Of course the best way to keep costs down is to live a healthy lifestyle. Insurance companies will take a whole host of lifestyle factors into play when deciding your premium, so the healthier you are the more likely you are to live longer and the less those premiums will be. Your weight, the amount of exercise you take, any health conditions and whether you smoke or not are all factored into calculating your insurance premiums.
Tip: It’s worth noting too that insurers still regard vaping in the same way as smoking, so swapping cigarettes for e-cigarettes is unlikely to reduce your premiums.
How age affects premiums
It won’t be a surprise that age plays a huge role on keeping your premiums low and it can be a huge cost saver to take out a life insurance policy at a young age (after the birth of your first child is common). Younger people are far less likely to die and so are a safer risk to insurers. What’s more taking out insurance at a young age will often qualify you for cheaper insurance when you get older.
It's a lot harder to take out life insurance when you’re over 50 but there are lifelong protection policies designed for 50-80 years olds which require no medical assessments. These policies are usually very expensive but premiums stop around the age of 85-90.
Other types of insurance to consider
There are other types of additional insurance protection you should consider to cover you such as critical illness cover or income protection insurance. The former of these will help you and your family if you are diagnosed with a terminal illness. Life insurance policies will not pay out until after your death. Critical illness cover bridges this gap and your life insurance policy can even be added to your critical illness policy.