Life policies are designed to give you peace of mind through knowing that your family and loved ones will receive a lump sum of money in the event that you pass away during the term of the policy.
The amount that the policy pays out is set on the day the policy starts. Depending on the type of policy you require, the policy will either run for a specific period of time or run for the rest of your life.
Why should you consider having life cover in place? Most people don’t want to think about the worst happening to them; however, if you have children or family who depend on you financially, having life cover in place can help reduce the financial strain they may become subject to if you were no longer there to provide for them.
Life cover typically does exactly what it says. It covers the policyholder for a set period of time and for a set amount of money. If the policyholder passes away during that time, then the insurance company pays out a tax-free lump sum to the policyholder’s estate. Some providers will also pay out if you are diagnosed with a terminal illness. This isn’t automatically granted with all providers, but for those companies that do offer it, the policy pays out in the same way for a specified terminal illness as it would should you pass away during the term.
Life policies do have some exclusions. If you were to pass away due to drug or alcohol abuse, then this would not be covered by your policy. If you take part in high-risk sports, then the provider may either increase the cost of the policy or exclude these reasons from your policy and subsequently not cover you for them. If you have underlying health issues, a similar approach is taken by most insurers.
What are the types of life cover?
Term assurance vs whole of life
Term assurance is designed to run for a set period of time. Typically, you’d have this in line with the duration of your mortgage or until you reach retirement age.
If you’re looking to arrange a policy that’s designed to run along side your mortgage, you can opt for decreasing term assurance. This means that, as your mortgage balance reduces over time, so does the level of cover. The policy is designed to pay out a lump sum that will enables your mortgage to be repaid in full. As the level of cover is decreasing over time, the monthly payments for the insurance policy are guaranteed not to change. As a result, you pay a fixed monthly premium from the day your mortgage starts until the day it ends. If you pass away during the term, the policy would pay out enough money to cover the outstanding balance at the time. If you survive the term of the policy, no money is payable by the insurance company and the policy expires.
A whole-of-life policy is designed to run until you pass away. This means that, unlike with the term assurance products, this policy will pay out a lump sum at some point in the future. The lump sum payable is a fixed amount that’s set on the day your policy starts. The monthly payments are fixed and remain the same each month throughout the term of the policy. As long as you maintain the monthly payments, the policy will pay out a tax-free lump sum once you pass away. As these policies have a definite outcome, they tend to be more expensive. The insurance company knows that, with a whole-of-life policy, they’ll have to pay out a lump sum at some point in the future. In comparison, the term assurance polices would only have to pay out a lump sum if you were to pass away during a specific period of time.