What Is Life Insurance, And How Does It Work?
Getting life insurance is one of the most selfless things that you can do. It enables your family to have financial support after you've gone and they won't have to worry about paying for the funeral and any other burdensome financial commitments.
It can go by other names (such as life cover, life assurance or death cover) and can often have slightly different policy details from one company to the next but all of them will work on the same premise.
In short, if you have life insurance and pass away then your beneficiaries are going to receive financial compensation. This insurance policy usually consists of monthly payments and will then be paid in a lump sum amount if you die.
Should I get life insurance?
While life insurance is a lot more important for some people than others, it can be a huge help for any family if a loved one passed away, regardless of age or financial situation. Here we look at the most common reasons to get life insurance.
- You have dependent children
- Your household relies on you financially
- There are others who rely on you
- Joint debt, such as a mortgage
- A family who couldn't afford a funeral
You can see these as 'high risk' reasons as if you passed away, you'd have loved ones who would greatly struggle to get by. Life insurance can never replace a loved one but it can remove the financial black hole that can be left behind and give them that safety net.
For the person getting life insurance, this will allow them to pass away in peace. Knowing that your family will struggle financially after you pass away can add greater stress and uncertainty. Life insurance will remove such worries.
When my father passed away, the life insurance payment was able to clear my mother's mortgage and allow her to have a lump sum to live off until she could restart work. While his passing was an incredibly tough time for the family, it would have been made infinitely more stressful without that financial cushion.
How does life insurance work?
There can be quite a few variants of life insurance policy but the basic premise remains the same. You agree to pay X amount (the premium) or an X amount of time (the term) and if you pass away then a pre-agreed amount (payout) will be paid to your beneficiaries. The beneficiaries are whomever you want to leave the money too, which is almost always immediate family.
The premium, term and payout can all be different depending on the type of policy you choose.
Premium – This is the amount you pay (usually monthly) into your life insurance policy. Generally the higher this amount, the bigger payout you'll have.
Term – There are policies that will carry on indefinitely and there are others that will be paid over a specific number of years. Term policies usually have a cheaper premium while still having a high payout. These two types can have their own variants.
Payout – This payout can be used for something specific like a mortgage, paid in a lump sum or staggered over a period of time.
Do life insurance policies cover all death?
This will depend on the type of policy you take out but most of them do. Policies won't cover suicide if it's within the first 12-24 months and deaths due to drugs or alcohol may not be covered, depending on the policy.
The biggest reason that life insurance doesn't payout is due to something that hasn't been disclosed. If you have diabetes but have hidden it, for example, and this directly results in your cause of death then this could void the policy. When taking out life insurance it's important to be open and honest as well as ensuring that you have everything covered that you need.
Will I be able to get life insurance?
Yes. If you're asking this question it will be because you believe there is a reason you may not be able too. When going through your policy an underwriter will assess your situation and take many factors into account before deciding on your premium.
If you have high-risk factors such as an existing illness, advanced age, a poor medical history or dangerous hobbies then your premium is going to be higher. You'll still be able to get life insurance but your premium would be higher than someone who is fit and healthy.
When should I get life insurance?
If any of the points apply to you in the 'should I get life insurance' section then it's the best idea to get it straight away. It's easy to get a policy and you will need to work with an advisor to see what type of life insurance would be best for you.
Some life insurance companies are quite rigid with their policies which can put some people off getting insurance as they don't want to be tied into an agreement. Other companies are a lot more flexible in the cover that they provide.
With policies you can amend, it makes it much more inviting to get life insurance now and change your policy as life dictates. You could start off with a very small premium before building it up when you get more financial responsibilities, such as a mortgage.
It's never too early to protect your family and loved ones. There are those for whom life insurance is vital, those for who it acts as a great safety net and others for who it would be a luxury. It's important to assess your own financial situation and see if it would be ideal for you.
If you are looking to get out a life insurance policy then you want to make sure that it works for you. It should evolve with your life situation and meet your individual needs. When you get the right policy, you'll have a peaceful and settled mind knowing that should the worst happen, your family will financially be okay.
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