It’s only natural to think about the future. After all, life moves so fast, if you blink, you could miss it. While it may not be on your mind right now, at some point you need to think about what could happen if you were to pass away.
You may have already thought about buying life insurance, or you might see it as a waste of money. Either way, it’s something that might come in handy for your family, later down the line. Here are some of the key details you need to know before you go any further.
Why do people buy life insurance?
There are lots of reasons why people decided to buy life insurance, such as:
- To provide protection for their loved ones when they die
- To cover their funeral costs and other death-related expenses
- To pay off debts and mortgages
- To leave an inheritance for their children or grandchildren
- To replace lost income for their family
- To have peace of mind knowing that their loved ones will be taken care of financially
How does life insurance work?
Specific types of cover can work differently, but as a standard life insurance, works like this:
- You agree to take out a policy, paying premiums monthly or annually
- When you die, your loved ones will be able to claim on your policy – providing the type of death is covered under your policy.
- Upon a successful claim, the insurer pays out the agreed upon sum to your beneficiaries – the people you’ve chosen to receive the money
- They can then use this money however they see fit, such as to cover living expenses or other financial needs.
Cover is usually purchased as one of two types – whole or term life insurance.
Term life insurance has a set policy term (for example 30 years), the policy pays out if you die within this time. If you outlive the term, you won’t be able to claim on the policy or receive a refund.
There are 3 types of term cover:
- Level – the payout amount and premium remain fixed throughout the policy term
- Increasing – the payout amount increases throughout the term to protect from inflation
- Decreasing – the policy is linked to a mortgage or large loan, the payout amount decreases throughout the term to protect the amount owed.
It’s typically cheaper than whole life insurance, as it only covers you for a set period of time.
Whole life insurance, on the other hand, covers you for your entire life as long as you continue to pay your premiums. It can also have a cash value component, which means that part of your premium goes into an investment account, which could grow over time. Because cover can be permanent, the premiums for whole life cover are typically more expensive than for term.
The policy you choose might come down to personal preference or reflects your financial situation and goals. Before you select either policy, you could consider speaking with a life insurance adviser for more information.
How much does life insurance cost?
Premiums can vary between providers, though there are several factors that are likely to impact how much you pay for cover, such as:
- Age
- Health
- Policy type
- Cover amount
- Cover length
Other factors may affect costs, such as if you smoke, or you have a hazardous occupation. If you have a pre-existing health condition, you may be asked to undergo a further health exam to determine your risk. Typically, the more cover you wish to take out, the higher your monthly premium will be.
Why might I not need life insurance?
While life insurance could be a huge help to your loved ones, it isn’t for everyone. If you’re single and have no dependants to support, it might make less sense to buy cover. That said, there may come a time in the future where you realise you could do with having life insurance, in which case it might be worth taking out a small amount of cover.
When should I buy life insurance?
As mentioned, you may not need life insurance when you’re young and single, but this may also be the time when cover is cheapest. Premiums are potentially lower for young people compared to older people, as there is less risk of death. With that in mind, it could be worth purchasing cover in your younger years, especially for policies with fixed premiums.
If you decide to buy cover when you’re in your 40s or 50s, you may end up paying higher premiums, even more if you develop a health condition. This doesn’t mean it’s too late or early to buy cover, rather when it makes the most sense for your personal situation.
It could be worth considering life insurance when you have dependents who rely on your income, such as children or a spouse.
How much life insurance cover do I need?
The amount of cover you may need can depend on various factors, including you and your household income, debts, living expenses, and future financial goals. A common rule of thumb is to have cover that is 10 times your annual income.
To determine the cover amount, you might want to ask you:
- Do I have dependants who rely on my income?
- Do I have any outstanding debts or loans that need to be paid off?
- Do I have a mortgage?
- What are my family’s monthly living expenses?
- Do I have savings and investments that could support my family in the event of my death?
Can I cancel my life insurance policy?
Your situation could change over time, in which you feel you could no longer need life insurance. Some insurers may have a cooling-off period (usually 30 days) during which you can cancel your policy and receive a refund of your premiums.
If you have a policy that has cash value, there may be penalties for surrendering your policy early. Should you wish to cancel or cash out your policy, it’s worth speaking to your insurer to learn about your options.
It’s important to note that different insurers will have their own guidelines and procedures. Speak to your chosen insurer for more information regarding your life insurance policy.