Life insurance is a simple concept. You pay money to an insurance company and, if you die, the insurance company pays out a money to those you nominate - known as your beneficiaries.
That means you can provide for your dependants by clearing any debts (such as a mortgage) and leaving the family finances in decent shape. No wonder life insurance is often seen as the bedrock of sensible financial planning. But as with many simple concepts, complexities soon arise when you start to explore further.
You need to ensure loved ones won't face financial hardship
First, there are different types of life insurance. And the older you are when you buy your policy, the higher your premiums will be. Your occupation, health and lifestyle will also affect the price.
So if you’re over 50 and don’t have life insurance, you’re facing a dilemma: as an older person, you’re getting closer to death (sorry – that's a fact of life!) and in need of this sort of protection. But at the same time, your age means a policy will be relatively expensive. So what to do?
Talking about death and its consequences is never easy, but let's not pull any punches. If you've got a partner and/or children, you need to ensure they won't face financial hardship if you die. For many of us, that means sorting out what would happen to the mortgage – it's by far the biggest debt most families carry.
The best way to cater for this is through 'term' insurance. You arrange the policy to run for a certain number of years (the ‘term’). The end-date could coincide with when your mortgage matures, or when your youngest child reaches 18, 21 or 25 (the longer the policy lasts, the more you’ll pay).
If you die during the term, the policy pays out. It has no other value, so you don’t get anything back if you survive to the end of the term.
The amount of life insurance you buy – the 'sum insured' – is the amount you want to leave to your dependants – enough to clear any debts and provide for their needs until they are self-sufficient.
As an older person, you’ll need to shop around to find the best deal. Hopefully, your age will mean the term of your policy will be reasonably short, which should keep a lid on premiums.
The other main sort of life insurance is ‘whole-of-life’ cover, where you pay premiums throughout your life (or until you hit, say, 90), with the policy paying out whenever you die.
These contracts can be a crucial part of investment and taxation planning, usually with advice from a professional financial planner. They're not designed for someone worried about the impact of their premature death on their dependants' financial well-being.
Some whole-of-life products are actively marketed at those aged over 50 - with acceptance onto the policy guaranteed with no medical checks. These products have their critics because both the premium (payable until death) and the sum insured are fixed - so, for those who live long enough, there will come a point where they've pay in more than the policy will eventually pay out.
That's one more reason to investigate the market thoroughly and shop around before choosing the policy that's right for you.
Thanks to Kevin Pratt from MoneySuperMarket
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