Two minute guide to... Life Insurance

What is life insurance?
Without sounding too simplistic, it’s insurance against dying. You pay premiums to an insurance company each month and if you die whilst the policy is in force, they pay an agreed sum to your dependents. It helps to protect families against financial hardship should a parent die.

Do I need life insurance?
Have a think about what would happen if you died? Would it financially affect those close to you? If yes, then you do need life insurance, particularly if you have dependents.

How much do I need?
Again, think about what would happen if you died. If you’re a wage earner, then you would need to replace that income, perhaps over a number of years. Even if you’re not a wage earner, you need to think about the impact your death would have on your household: extra childcare costs for example.

You need a lump sum that will help your dependents to produce enough income to make up the difference. They could invest the lump sum to produce a monthly income or use up some of the capital each year, perhaps until children leave school.

However, don’t insure for more than you really need as every penny spent on insurance is a penny less spent on savings, which will help you and your family if you do survive. It’s all about striking a sensible balance.

What types of insurance are there?
The simplest type is term insurance, which promises to pay out an agreed lump sum if you die during the term of the insurance, e.g. £150,000 if you die within the next 18 years. It’s the cheapest type of insurance on the market.

Level term insurance means that your monthly premiums and the level of cover you have will remain the same throughout the length of the policy. Renewable term insurance allows you to extend the term of the policy. Decreasing term insurance means that the amount of cover decreases throughout the term (usually sold alongside repayment mortgages where the amount owed decreases over time). Increasing term does the opposite and increases your cover as your earnings increase. Family income benefit gives an income for a set period after your death.

Whole of life insurance promises to pay out an agreed lump whenever you die, so long as you keep paying the premiums.

How much will it cost?
The cost depends on three things. Firstly, the higher the payout you want, the more it costs. Check whether your work offers “death in service” benefit. If so, you can reduce the cover.

Secondly, the shorter the term, the cheaper it is. Many people often take out policies to last until their children finish full-time education. If that’s in 17 years time, then take out a policy for 17 years, not 20 or 25 or whatever someone tries to sell you. Thirdly, the less risk you are, the less you’ll pay. Your age, health and whether you smoke will all affect your premiums. Overweight smokers in their forties will pay more than fit thirty-somethings as they are more likely to die within the insurance term.

Where can I buy life insurance?
The choice is staggering. Banks, building societies, IFAs, insurance companies and even insurance companies all sell life insurance. Have a look online at "best buy" tables and shop around: don’t just accept the first quote you receive.