Taking out life insurance can be confusing if you don’t answer a few key questions before putting in an application.
This FAQ answers a few of the more complicated questions about the different types of life assurance and the potential pitfalls of arranging cover:
Who is going to benefit from the cash?
This does not have to be just one person, but can be your wife, children, other relatives, and friends or loved ones – even your favourite pet or charity.
Prioritise their need
You might want to leave some money to a friend, but if they are working and can support themselves but a spouse or children need your financial help, then they should come first.
How much do they need?
If you are protecting your spouse and children, consider costs like replacing your income for a year a two and paying off the mortgage and any debts.
Unless you have low debts or a high disposable income, it’s unlikely you will be able to provide for them for life, so look at covering a year or two to enable them to get on their feet after you have gone.
Don’t forget illness and disability
Life assurance can also include critical illness cover that is designed to pay the bills when you cannot work due to long-term sickness, like cancer or heart trouble, or disability, for example, following a serious accident.
Critical illness cover will put up the cost, but many insurance buyers mark it as a necessity.
How long do you need the cover?
Life insurance comes in two main types: whole of life and term.
Whole of life means what it says: you pay for cover for your entire remaining life.
Term insurance also means what it says: you pay for life cover for a particular period, say 10 or 15 years. At the end of the term, the cover ends and you receive nothing back.
How much will the policy pay out?
It’s easy to believe you pay for £50,000 of cover and that’s what the insurance company will give to your beneficiaries.
Some policies have decreasing cover; these often cover mortgages and are aimed to reflect that as time goes by, less money is outstanding on the loan, so a smaller payout is required at the end of the policy.
If you want the full £50,000 throughout the time the policy is in force, opt for level term cover. Decreasing term is cheaper than level term cover.