Understanding Life Insurance

In this section we help you understand what Life Insurance is, who may need Life Insurance, the benefits of Life Insurance and things to consider before you buy the Life Insurance policy for your individual needs.

To better understand what life insurance is, it helps to understand insurance.

What is insurance?

There are many misconceptions about insurance, and it is often not easy to understand the jargon – that’s one reason many people simply put it in the ‘too hard basket’. In a nutshell, insurance means that we pay a relatively small premium to have an insurer cover the risk of damage or loss for us – so in many cases – we or our family don’t end up losing our life savings or more if something were to happen.

Put simply, when a person takes out a Life Insurance policy, they pay a contribution (premium). The premiums of policyholders are ‘pooled’ along with the contributions of all other policyholders, making a ‘pot’ of money which policyholders claim from in the unfortunate event they need to. The policyholder does not get the premiums back if they don’t make a claim.

Life Insurance helps cover the cost of unexpected, unfortunate events – serious illness or disability, and death. It can help protect the financial safety of you and your family.

If you have a family or other dependants to take care of, then Life Insurance may be worth considering. Especially when there’s a mortgage, debts, rent or day to day living expenses that would be a struggle for your dependants to cover if you were no longer around.

Life Insurance can help make sure your family’s home and lifestyle are secure if you were to unexpectedly pass away.

But life insurance isn’t just for people in the paid workforce. Losing a home-maker in the family could also have a devastating impact on the finances. For instance life insurance can help take care of the cost of child care, unforeseen debts and other household expenses if the worst were to happen.

Of course, if your family has two working partners the loss of either partner means a loss of income that could have a serious impact on the household budget. That’s why Smart offers the flexible Joint Plan where you and your partner can be insured on one policy and you can each select your individual benefit amount.

To provide income

The financial burden to a family can be substantial if an income provider dies. The impact can mean a much lower standard of living than you might have dreamed of for them. Life Insurance can provide a measure of financial security for your family if the worst were to happen.

To fund family goals

The lump sum pay-out can also be used to fund family goals, for example to assist with University fees, or simply paying off loans or something substantial, such as your mortgage.

To help with unexpected expenses

If a person is seriously ill, extra medical expenses can quickly eat up any savings, and funeral costs are often an expense that we often neglect.

Life Insurance can help with these costs. Smart Family Life Insurance pays out the full benefit in the event of terminal illness (as well as death).

To preserve your legacy

Outstanding bills can be another unforeseen cost – for example credit cards, utility bills, etc can all add up and create extra strain on the cash flow of those you leave behind.

Life Insurance can help make sure you leave your loved ones with happy memories.

Tips to help you decide which Life Insurance policy may be right for you

When thinking about Life Insurance from different providers, here are some things to think about and compare.

There are some things you need to consider when making your decision

For example if you cancel your policy there is no cash-in value and inflation may reduce the value of your benefit amount. Also, depending on how long you live, you may pay in more than you get back.

Which policy type?

To help you decide which policy type is best for your circumstances, consider why you need Life Insurance. Is it to ensure that a mortgage or specific debt is covered in the event of your death, or is it to cover the mortgage and provide a cash benefit to your family to support their longer term living needs should the worst happen?

If it is simply to cover a mortgage or other debt, then perhaps a fixed term policy would be suitable for you. The insurance term can be fixed to fit in with the term of your debt repayments.

If your goal is to ensure financial protection for your family in the longer term, ie to pay off a mortgage and also provide a cash lump sum for your family in the event of your death or terminal illness, then you may want to consider a policy that is renewable for life, so you can keep it for as long as you need it.

Consider: Do I want a fixed term or a policy that is renewable for life?

How much life insurance cover?

The amount of cover you need will depend upon your individual circumstances. But to work out what might be right for you the sort of questions to ask yourself are: how much would be needed to cover my funeral, how long into the future would my family need the money to keep them going (the age of your children could influence this), how much would my family need to pay off the mortgage and other debts, such as loans, credit cards? The sum of all these parts will give you an idea of how much life insurance you may need.

Consider: Is the insurer able to provide you with the level of cover you are looking for?

Cost?

Of course getting a quote is one of the first steps, and it is generally a quick and easy way to get an idea of the cost of your Life Insurance. But the premium payment option you choose can also influence how much you pay in the short and the long term.

You can choose a policy in which the premiums increase each year based on your age and risk factors, or a policy which has premiums that are fixed for the term of the policy.

With a fixed premium policy the term is usually fixed. With a yearly increasing policy, there are policies available which you can keep for life.

Generally speaking the yearly age based policy will be cheaper in the early years (than the fixed policy). So when thinking about the cost you also need to factor in how long you would like to keep your policy and the reason for getting the life insurance in the first place.

Consider: Does the insurer offer fixed premium as well as age based premium policies?

Also, when comparing Life Insurance policies, make sure you know exactly what they are going to cost you, by checking there are no hidden fees added to your premium.

Consider: Are there any hidden fees?

What is the alternative to life insurance?

Life Insurance is not for everyone. If you live alone, don’t have dependants, or debts, or have healthy savings and investments, then it may not be right for you. But if this is not you, then the alternative may be a savings plan or long term investments. The downside of this approach however is that you cannot predict the future – you don’t know when you are going to die, so you have no certainty that the money would be there when it was needed. You simply may not have enough time to save / invest to provide the financial protection that your family would need.

Having Life Insurance in place could mean your family would not be faced with the financial strain of having to manage without your income. It could mean that they can keep the family home and maintain their level the lifestyle.

Consider: Do I really need Life Insurance, or will my savings and investments be enough?

Is my money and pay-out safe?

For added peace of mind, ensure that your policy is provided by an insurance company regulated by the Financial Conduct Authority, and a member of the Financial Services Compensation Scheme. Further information about compensation scheme arrangements is available from the FSCS website www.fscs.org.uk

Choose wisely

Once you have your Life Insurance in place, as time goes by it can be difficult to move from one insurer to the other, as pre-existing conditions could be excluded in new policies, or could increase your premium rate. So do your homework, review the insurance, and compare the premiums and options available. Choose wisely, taking account of your budget and needs, as it’s best to think about being in it for the long haul, because as you get older the more valuable the cover is likely to be. Consider the benefit amount you need and that inflation may reduce the value over the years. Depending on how long you live, and your benefit amount, you may pay in more that you get back. And of course, you'll be covered whilst you are paying your required premiums, but if you cancel your policy, you won't get anything back.

Here is a quick check list of some things to look at when you are comparing Life Insurance:

  • Is the maximum benefit offered adequate for my needs?
  • Are there limits on benefits payable, for example waiting periods.
  • Are there any exclusions?
  • Are there any special offers available.
  • Is the policy guaranteed renewable for life?
  • Are there optional covers for added peace of mind?
  • How flexible is the cover if my circumstances change?
  • How easy is it to get this insurance sorted?
  • Is there an option to increase or decrease cover?

Things you need to consider

  • There is no cash-in value at any time
  • Inflation may reduce the value of your benefit amount
  • If you reduce your benefit amount, your Lifetime Payback Guarantee amount will be reduced by the same proportion
  • For the first 24 months of Guaranteed Insurance, you will only be covered for accidental death