You’ve probably heard that life insurance is important. But how does it work?
If you’re considering getting life insurance for the first time, this guide will help you understand what it is, how it works, and why people purchase it. We’ll also answer some common questions people have about it.
What is life insurance?
Life insurance is a policy that pays out money to your loved ones if you die while the policy is active. The money is known as a payout or sum assured.
You pay a monthly or annual fee (called a premium). In return, the insurer agrees to pay your family a lump sum if you pass away during the policy term.
This can help them cover expenses such as mortgage payments, living costs, childcare, or funeral costs.
How do you take out life insurance?
- Choose the type of policy
There are different types, such as term life insurance and whole-of-life insurance. Term policies last for a set number of years. Whole of life policies last until you die, no matter when that is.
- Decide how much cover you need
Think about what your family would need if you weren’t around. You can choose a fixed amount or one that decreases over time, such as when covering a mortgage. Our specialists can help you find the amount you need.
- Complete an application
You’ll usually need to answer questions about your health, job, lifestyle, and whether you smoke. Some policies might require a medical exam, but most don’t.
- Start paying premiums
Once your policy is in place, you’ll start paying for your policy (this is called your premium) monthly or annually.
When does it pay out?
A life insurance policy pays out if you die while it’s active. The money typically goes to your chosen loved ones (beneficiary/ies), such as your partner or child.
Some policies will also pay out early if you’re diagnosed with a terminal illness and have less than 12 months to live. Most life insurance policies include terminal illness cover as standard.
What if I stop paying?
If you stop paying your premiums, your policy will no longer be active, meaning you are no longer covered. It’s important to keep payments going unless you’ve agreed on a different arrangement with the insurer.
Who needs life insurance?
Life insurance isn’t just for people with kids or mortgages. It can help protect anyone who depends on your income or would be financially affected if you died.
That could be a partner, elderly parents, a sibling, or even a business.
Is the payout taxed?
Life insurance payouts are usually free from income tax and capital gains tax. But they may be counted as part of your estate, which could be subject to inheritance tax.
You can often avoid this by putting your policy in trust. This is something we can help you with, we offer a free trust service to all of our customers.
FAQs
What’s the difference between term and whole of life insurance?
Term life insurance runs for a fixed number of years. Whole of life runs until you die. Term life insurance is usually cheaper, but whole of life insurance guarantees a payout.
Do I need to be in good health to qualify for life insurance?
Not necessarily. You’ll need to give details about your health, but many insurers may still offer cover if you have medical conditions, the cost may be higher though.
Can I have more than one policy?
Yes. Some people take out multiple policies for different reasons. For example, one to cover the mortgage when they pass away and another to financially support their family when they pass away.
Is life insurance expensive?
It depends on your age, health, and how much cover you want. But many people are surprised at how affordable it can be, especially if you’re young and healthy.
Do I get anything back if I don’t die during the policy?
With term life insurance, there’s no payout if you outlive the policy. It’s like car insurance – you’re paying for peace of mind, not a guaranteed return.
Final thoughts
Life insurance gives your loved ones financial protection if the worst happens. It’s not just about the money. It’s about knowing they’ll be okay even if you’re not there.
It works by paying a regular premium, and in return, your family receives a payout if you pass away during the policy term. Simple, straightforward, and often more affordable than you’d think.
If you’re ready to protect your family’s future, start your free quote today.
