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A beginner's guide to life insurance

We explain what life insurance is all about, and throw in a few handy hints for good measure.

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When you take out a life insurance policy, you’re relying on the cover to offer solid financial protection to your family when you die.

It makes sense to do your homework before you sign up, so you can be sure you’re getting the most appropriate cover and best-value deal.

What is life insurance for? | How much cover should you take out?
How long should the cover last? | Should the level of insurance change over time?
Should you get cover for your partner too? | What factors affect the cost of life insurance? Saving tax and hassle

What is life insurance for?

Before you sign up for a policy, you need to work out exactly why you want to be covered: 

  • Bought a new home - a life insurance payout could allow your partner or family to pay off the mortgage after your death.
  • Having children - a life insurance payout could provide for them while they’re growing up if they could no longer rely on your income.
  • Leave a legacy - a policy could provide your surviving relatives with an inheritance when you die.
  • Funeral costs – a policy that could provide your family with a lump sum to assist with funeral costs.

How much cover should you take out?

In general, the more protection your life insurance policy offers, the higher your premiums.

If you’re looking to cover your mortgage, working out how much cover you need should be straightforward. Use our life insurance calculator to figure this out. 

If you want to provide your family with a regular income after your death, you should look at your current outgoings and think about possible future costs to work out an accurate figure.

If you’re over 50 and your main concern is leaving an inheritance, or helping your family cover funeral costs, the cover may depend more on what you can afford to pay in premiums. 

Read more about the different types of life insurance.

How long should the policy last?

Big family holding hands

When you buy life cover, it can last either for a fixed period or for the rest of your life.

A policy that lasts for a fixed time period is known as term.

If you only want cover for your mortgage — which will typically last 25 years — or to give your family a financial safety net, then term insurance is usually more appropriate.

If you’re planning on going strong and outliving everyone, great for you.

However, the downside to term insurance is that, if you live longer than the policy term there’s no payout, so it might be worth looking at a different type of policy.

If, on the other hand, you want the policy to provide an inheritance, whole-of-life insurance could be a better bet.

Should the level of insurance change over time?

If you’re covering your mortgage, the amount you owe will fall as you make monthly repayments.

So it makes sense that the scale of your life cover reduces in line with the loan.

This is known as decreasing term insurance. Premiums tend to be lower than level term insurance, which stay fixed throughout the term of the policy.

Should you get cover for your partner too?

couple infront of fireplace

Traditionally, the main earner in a family would take out life cover. However, if the partner earn less or they’re a stay-at-home parent, there could still be a financial impact if they died. 

Also, if you have children you may need to think about costs for child care or domestic work.

If both partners want cover, you can either buy joint life insurance or two separate policies. Joint cover only pays out on the first death, after which the policy ends.

Separate policies would usually pay out when either partner died, offering a higher level of protection.

option may be more expensive, but it’s worth comparing prices to see whether it’s worth both of you getting covered - read more about the differences between the two.

What other factors affect the cost of life insurance?

As well as the scope of cover and how long it lasts, there are a number of issues that can impact the size of your premiums, including:

  • Your age
  • Your health
  • Your lifestyle
  • Your family medical history

Hazardous jobs and hobbies might also affect the size of your premiums. If you’re a pilot or enjoy mountain climbing, then you might see your prices go up.

You can find more about how life insurance premiums are calculated.

Saving tax and hassle

One more thing to consider is writing your life insurance policy in trust.

This means your family may be able to get hold of any payout with the least hassle and the lowest possible tax charge when you die.

Writing your life insurance policy in trust means the cover is ring-fenced outside of the rest of your assets, such as savings, investments and property.

Payments from the policy are not usually included in your estate for inheritance tax purposes. You can find more information in our guide to writing your life insurance policy in trust.

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