Life Insurance Explained

What is life insurance?

Many of us will at some stage in our lives have the need for life insurance. Life insurance is an agreement between you and an insurer and under the terms of a life insurance contract, the insurer promises to pay a certain sum to a designated beneficiary when you die, in exchange for your premium payments.


Why would you need life insurance?

The most common reason for buying life insurance is to replace the income lost when you die. For example, say that you work, and that your income is used to support yourself and your family. When you die and your income stops the life insurance proceeds can be used to continue to support the family members you've left behind.
Another common use of life insurance proceeds is to pay off any debts you leave behind. For example, mortgages, car loans, medical bills, and credit card debts are often left unpaid when someone dies. These obligations must be paid from the assets left behind but can deplete the resources that your family needs. Life insurance can be used to pay off these debts, leaving your other assets intact for your family to use.
Life insurance provides liquidity to your estate. When you die, you may leave some liquid assets (such as cash, savings bonds etc), and some illiquid assets (such as real estate, motor car, and stocks). Your liquid assets may not be enough to pay all the debts that you leave behind, plus all the expenses that arise because of your death (like funeral expenses). Your illiquid assets may have to be sold in order to meet these obligations when they come due. This may cause a financial loss if the assets must be sold cheaply in order to get the money on time. Life insurance can avert this situation, because the proceeds are available almost immediately upon your death.
Life insurance creates an estate for your heirs. After your debts and expenses are paid, there may not be much left over for your family but life insurance can automatically provide assets for them after your death.

What do you need to know about life insurance?

You need to know that there are several kinds of policies that may be available to you, if you are healthy enough.

1. Level Term Insurance - A life insurance plan that pays out a lump sum in the event of your death during a specified term, some plans also pay out should you be diagnosed with a terminal illness.

2. Mortgage Protection - A form of life insurance designed to cover a capital & interest mortgage, in the event of your premature death, where the lump sum payable decreases in line with your reducing mortgage debt.

3. Specified/Critical Illness Cover - A critical illness plan provides protection in the event that you suffer a critical illness such as cancer, a heart attack or stroke

You also need to know that the cost of life insurance will depend upon the type of policy, your age, and your health. A life insurance contract is made up of provisions, options, and riders.

1. Provisions describe or explain features, benefits, conditions, or requirements of the contract.

2. Options are features of the agreement that require you to make a choice regarding some aspect of coverage.

3. Riders are additional coverage (or endorsements) offered by the insurer at the time of application and added to the standard agreement in return for an additional premium.


Frequently Asked Questions

1. What is the Difference between Life Assurance and Life Insurance?

Life Assurance - The original product offered by Life Assurers was based on the idea that eventually the product would be enforced. Assurers paid out on event of death, or circumstance leading to death, which resulted in the product being known as 'Whole of Life'. Most companies no longer offer a 'whole of life product' or 'Life Assurance' but tend to offer a number of 'Life Insurance' products. These are more suited to individual requirement and put less risk on the policy provider.

Life Insurance - The development of new products by insurance companies has led to better classification of products, more suited to individual requirement.

Level term' or 'mortgage protection' are both forms of life insurance and cover a specific period. For example, 'level term' insurance is used to cover a specific period and may be used by a person who has paid off a mortgage but still wants to protect his family in the event of death.

'Mortgage Protection' covers the period of your mortgage; once the mortgage has been repaid your need to protect it becomes obsolete.

Life Insurance does not have to take the form of one policy. For example, a divorcee may have a mortgage protection policy, a level term policy to protect any offspring in the event of death, and may insist as part of any divorce settlement that the former spouse or new partner has suitable protection to cover offspring.

2. Will Smoking Affect my Policy?

Smoking is detrimental to health and is a leading cause of life threatening illnesses. As a result smokers pay higher premiums than non-smokers as the risk of them dying early is greater. Each insurer uses its own methods of weighting the additional premium payable.

An insurer who covers a period of your life will want to protect their investment in you. While the term of your insured period runs, you agree to abide by the terms and conditions of the insurer. If you do not abide by the terms and conditions you will invalidate your protection.


Most importantly, if you smoke and do not declare the fact, you run the risk of invalidating your policy if you have to make a claim.

This can have a huge financial impact on those who depend upon you and are unable to make use of the money that would have been allocated to them in the event of a successful claim.

3. Does my sex or age affect the premium?

It is a known fact that women tend to live longer than men. A female who insures herself using a 'level-term' policy is likely to have lower premiums than a male. This is based on the fact that females live longer and are less likely to claim during the period insured.

However, if she took out critical illness protection it is likely that her premium will be higher than a males, as she is more likely to encounter a critical illness at some stage in the term.

Age is a factor in the successful application for a life policy. Most insurers have an age bracket for the provision of insurers (usually to the age of 75). If you are over 75 it is unlikely you will be able to find cover. If you want cover after the age of 75 it is important to take it out early.

Finally, the older you are the greater the risk to the insurance provider so the higher your premium will be. This starts from the earliest insured age and continues in brackets up to the age the insurer will cover to (e.g. 75).


Glossary of Life Insurance Terminology


Accident Cover

This is an option on your life cover policy, whereby if you can't work because of an accident, you receive either a regular income or a lump sum.


Beneficiary

The person who is to receive the benefit of your policy.


Cooling-off notice

This refers to the time that the customer has to think about and cancel the policy if they wish to. No charges apply in relation to a cancellation effected during a cooling off period.

Decreasing term

Life insurance which pays out a lump sum if you die within the term, but where the insurance sum assured reduces during the term. This is usually the cheapest form of life insurance and is required for anyone taking out a mortgage (unless waived in specific circumstances by the lender). This type of cover is usually called Life Home Cover. The aim of the policy is to enable your mortgage to be fully paid off in the event of death during the term of the policy.


Dual life

Each life is insured individually under one policy.

Executor

The person appointed within a will to carry out its instructions.


Guaranteed insurability

Option to take out (additional) life cover without having to provide medical evidence.
Hospital cash cover
You are paid a daily amount if you're in hospital.


Index linked / Indexation

The amount of your cover as well as your premium are increased each year in line with general inflation. This makes sure that the amount of cover you take out has the same spending power during the term of the cover.

Joint Life

Your benefit is paid on the death of just one of the people covered, once the benefit is paid the cover on the second surviving life stops.

Joint Life 1st event

Benefit is paid on the first death of either insured party

Joint Life 2nd event

Benefit is only paid on the death of the 2nd insured party


Lapse

If your policy lapses all cover ceases. This normally happens if your payments stop.


Loading

Extra charge for cover, applied for underwriting reasons usually for medical or occupational reasons.

Life assured/ covered

The person upon whose death/illness, the benefit will be paid.

Life insurance /Life cover /Level term insurance

The simplest form of life insurance, which pays a fixed amount of money (lump sum) if you die during the term of the policy.

Medical evidence

Medical information you may have to supply to a life company. A life insurance company may seek medical information from your GP in certain circumstances or require an independent medical examination from a GP other than your family physican.


Non-disclosure

If when you first take out your policy you give incorrect information or fail to disclose anything which may affect a life company’s decision to accept your application. The life company can refuse to pay a claim.


Permanent Health Insurance (PHI)

Permanent Health Insurance will pay you an income if you become ill for a long period or if you become disabled and can't work. Most PHI policies have a waiting period of 13, 26 or 52 weeks but continue to pay you an income, in the event of a successful claim, until your normal retirement age or until you are fit to return to work, whichever occurs first.


Policy document

The legal document which sets out the basis on which your policy is issued and the benefits which are payable. Keep it safe!
Policyholder
The legal owner of the policy.


Premium (payment)

How much you regularly pay for your life assurance. This is usually paid monthly or annually.


Private medical attendants report

A life company may seek evidence of your medical history or status from your GP prior to accepting your application. The report your GP's issues to a life assurance company in called a PMA (Private Medical Attendants Report)


Renewable term insurance

Life insurance which pays out if you die within the period of protection, but which gives you the option to renew the cover at the end of the term without requiring further up to date medical evidence.


Specified illness cover/ Serious illness cover /Critical Illness Cover

Depending on your policy this cover pays you a lump sum, if you are diagnosed as suffering from one of a number of specified severe illnesses.


Trust

You can put a life insurance policy in trust so the proceeds of the policy go straight to your chosen beneficiaries when you die.


Trustee

A person who you nominate to carry out your instructions as given in your trust.


Underwriting

Where an insurance company takes into account known facts like your age, smoking status, previous health history and occupation in order to assess the likelihood of you making a claim on the policy. Your insurance payments are calculated after taking these factors into consideration.


Whole of life

Life insurance that you pay throughout life, rather than for a fixed term. Cover can be maintained throughout life provided you pay the required premium which is subject to review.