Life insurance (A.K.A. life cover, death cover, or life assurance) isn’t for everyone. But if your family is likely to struggle without your financial support, a policy can give you real peace of mind about what might happen if you died. So, what is life insurance, and how does it work? Let’s see…
What is life insurance?
Life insurance is a type of insurance policy. You pay in money regularly, and in turn the provider promises to give your loved ones a certain amount of money if you die.
Why get life insurance?
What is life insurance for? Well, if you’re the main breadwinner in your family, it can give you peace of mind about how they would manage if something were to happen to you. It’s useful if:
- Your partner depends on you financially, even just a bit (e.g. you split the rent and they couldn’t pay it without you)
- You have young children
- You have a mortgage that your family couldn’t pay without you
- There is someone who depends on you for their living costs (an elderly or disabled relative, for example)
In all these cases, your family might really benefit from a life insurance pay out if you died. Even a small pot of money can help them keep their heads above water until they’re able to make new plans.
Watch out! If someone is currently on government benefits, a life insurance pay out might cause those payments to stop. Do your research before taking a policy out.
How does life insurance work?
If you take out a life insurance policy, you’ll pay the provider an agreed amount of money (called a ‘premium’) on a regular ongoing basis. You can usually pay either monthly or annually.
If you die, the insurance provider will pay your family an agreed sum. You can set it up so that they get one big payment or so that they get it gradually, in installments.
How big your premiums are and how big the payout will be depends on the policy you choose. If you’re a fan of extreme sports or enjoy other risky activities, your premiums might be also higher.
What does life insurance cover?
What your life insurance policy covers really depends on the provider and the policy you choose. It’s important to read all the small print when you set the policy up. But here’s a general idea.
Usually, life insurance policies only pay out if you die. And what you die of matters. Most policies have a clause that means they won’t release funds if your death is caused by drugs, alcohol or suicide, for example. If you have an illness when you take the policy out, and that’s what kills you, then it also might not be covered.
What if I become too ill to work?
If you want an insurance policy that pays out if you become disabled or too ill to work, life insurance is not the best option. Critical illness or disability cover is more suitable.
However, few life insurance policies do provide something called a ‘terminal benefit’ – this is a payment you can apply for if you’re diagnosed with a terminal illness.
What are the different types of life insurance?
There are a few different types of life insurance policy:
- Whole-of-life insurance policy – pays your loved ones a set sum whenever you die, as long as you’ve kept up with the premium payments
- Term life insurance policy – has a set period of time during which you make payments and the provider agrees to give your family a pay out if you die. You may then be able to renew.
- Decreasing / increasing term insurance policy – a term life insurance policy where the size of the pay out increases or decreases over time. Decreasing term insurance is often used to compensate for the fact that mortgage payments can decrease over time.
- Joint life insurance policy – you and your partner take out a policy together, and the provider pays out when either one of you dies.
When is life insurance not needed?
Life insurance doesn’t always make sense. If you’re single and don’t have kids, you might not need to provide for anyone. Or your family might be more than capable of managing financially without your income (although they will miss you, of course).
Your work might also offer ‘death in service’, which means that if you die while working for them, they’ll give your family a big lump sum anyway.
If you’re concerned about paying for a funeral, a funeral plan might be better than life insurance. You make a few payments upfront, while you’re still alive, and the provider will take care of all the key expenses of your send-off when you die, so that your family don’t have to worry.
Protect your family’s future: Make a will
Isn’t it about time you got around to making a will? If you’re considering life insurance, then it’s important to make sure you have a valid, up-to-date last will and testament as well. Making a will is the only way to make sure your assets go to the people you love when you die. And it can also help you make sure your family know how to claim your life insurance policy when the time comes.
Here at Beyond, you can make a will online in just 15 minutes, all from the comfort of your own home. Just sign up, answer a few simple questions and you’ll have a valid will to print off and sign. It’s peace of mind, in minutes.
Click here to try our will writing service.