Guide to Life Insurance

Life insurance (also referred to as life assurance or life cover) is one of the most basic, yet crucial, forms of protection for those with dependents.

Many employees receive death in service benefit (i.e. life insurance) from their employers as part of their package of benefits. However, for a business owner or anyone else working for themselves, this will obviously not be the case.

Life insurance pays out a set lump sum to your dependents in the event that you die whilst the life cover is in force. In this way, life assurance offers peace of mind about the future, as it means that your partner or children will not be left struggling to pay the bills in the event of your death. This is a particularly important consideration if you are the main breadwinner or if you have a mortgage.

With the cost of living continuing to rise, and house prices at an all time high, it is no good relying on the State to provide support for those left behind if you die.

At the time of writing, the State benefit system provides two main benefits to a parent whose partner has died. These are the Widowed Parentís Allowance (WPA) and Child Benefit.

A widowed parent whose late husband or wife paid National Insurance contributions will be entitled to the Widowed Parentís Allowance. This is currently worth up to a maximum of £79.60 per week, plus £9.65 per week for the eldest child and £11.35 a week for each other child.

Child Benefit provides an additional £16.50 per week for the eldest child and £11.05 for each additional child.

So, for a widow or widower with two children, this works out to a weekly allowance of £128.15 or an annual benefit of just £6,663.80. For those who are used to living on two salaries, the State benefits are not going to be sufficient, and the widow(er) will almost certainly find it difficult paying the mortgage, rent, or other living expenses.

It is in a situation like this that life insurance can help you maintain your lifestyle at a time of great emotional loss.

When considering taking out life assurance, it is important to give careful though to the amount of cover required. Many people believe they only need to take out enough life cover to pay off their mortgage, but it is important to take into account all the other expenses of day-to-day living such as bills, loans, school fees, clothing, etc. At the same time, there is no point being over-insured, as this will have an impact on the premiums you pay.

In determining the monthly premiums for life assurance, the insurance company will take into account a number of factors such as your age, sex, state of health, and the amount that you smoke or drink.

There are two main types of life insurance: term assurance and whole of life insurance (WOL). Term insurance is the cheaper of the two options. It runs only for a fixed length of time (the term), and will only pay out if you die during that fixed term. At the end of the term, cover ceases. Term assurance is usually timed to coincide with the end of a large financial commitment, such as mortgage repayments or a childís education.

Whole of life cover remains in force right the way through until death. Premiums are higher than for term assurance, as it is a certainty that the insurer will have to pay out at some point on every single policy. Some whole of life insurance policies require the monthly premiums to be paid until the death of the policyholder, whilst others become paid up at a certain age and the premiums then cease even thought he cover remains in place.

Within these two broad categories of life insurance, there are various options, such as decreasing term assurance. With decreasing term assurance, the level of cover goes down as time goes by. This type of policy is often used to protect a capital and interest mortgage, where the mortgage debt gradually decreases to zero during the term of the life assurance policy.

It is also possible to obtain a life insurance policy that includes critical illness cover. This type of policy pays out a lump sum on death, or earlier if you suffer a serious illness such as a heart attack or stroke.

Because of the wide range of policy types available, it is recommended that people take independent financial advice from an IFA to ensure they get the best type of life insurance policy and the right level of life cover for their particular situation.

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