Guide to Life Insurance

Most of us have heard of Life Insurance and appreciate that it is a policy provided by an insurance company, that pays out either a lump sum or a series of payments when you die. These payments are normally paid without the deduction of any tax, and in most instances are tax-free.

The proceeds of a policy can used:

to pay off a debt such as a mortgage
to provide an income for your dependents
as a savings scheme.

Life policies can be combined with other forms of cover, such as Critical Illness Insurance so that you receive the lump sum if you are diagnosed with a serious illness.

There are three main types of life insurance

Term: this is the most common form of life insurance. It pays out a lump sum if you die during the term of the policy.

Family Income Benefit: this scheme provides an income for your dependents rather than paying them a lump sum, if you die during the term of the policy. You should note that the income is only paid for the time remaining on the policy, so you will need to make additional arrangements to go on providing an income after the policy expires.

Whole-of-Life: this type of policy is designed to pay out at the time you die whenever that date should be. Therefore as long as you maintain the policy there is guarantee that on your death the sum assured will be paid to your Estate. Some policies require premiums to be paid right up until the point of death others have a maximum term for which premiums are payable.

Endowment: this is a savings plan with an element of life cover, so in the event of death before the end of the term the policy provides you with a lump sum, often known as the maturity value.

The premiums for policies vary according to your personal circumstances, such as your age and previous medical history.

Pension plans - personal or occupational - may include an element of insurance if you die before you reach the set retirement age on your pension. Often in the case of occupational pension schemes the cover is normally expressed as a multiple of salary. If your cover is arranged through an occupational pension scheme of your current employer, you should seriously consider starting a new policy to replace the cover if you leave your job.

This is especially important, as an interim measure, if your new employer only provides cover after you have completed a given period of time, for example a probation period.

Within the general definition of term insurance, there are a variety of policies.

Level Term: the premiums you pay and the amount of the cover remain constant throughout the term of the policy.

Decreasing Term: the amount of Life insurance protection decreases over the period of the policy, although you continue to pay the same premiums. This type of policy is typically used to pay off an outstanding debt which decreases over a period of time, such as a Repayment Mortgage.

Increasing Term: the amount of cover and the premiums increase each year, generally in line with inflation. This type of cover can be used to provide an income for your dependants, as it is more likely to track the income they would require were you to die.

Convertible Term: at the end of the policy, you have the option to convert to a whole-of-life policy or an endowment, based on your health when you started your original plan.

Convertible Term policies normally require you to pay slightly higher premiums than an equivalent level Term insurance policy. This type of policy is useful if you believe your health may deteriorate over a period of time.

This does depend upon the type of policy you own. However unless you have a policy that contains an investment element then you are unlikely to receive the value of the premiums you have paid.

In most cases if you stop paying the premiums to your policy, the life insurance cover will stop. If you wished to reinstate the policy at a later date then fresh medical evidence would generally need to be supplied to the insurance company before cover could be reintroduced.