Life insurance guide: how it works, types and benefits
What is life insurance?
Life insurance – also known as life cover – is designed to help financially protect the family of the policyholder by paying an amount of money if the life assured passes away during the policy term.
It provides financial help to loved ones when you die – meaning one less thing to worry about during a challenging time.
This can be used to help pay debts, a mortgage, funeral expenses (if this isn’t already covered) or simply everyday expenses.
People may neglect to think about life insurance because of what it means for them and their families. But, in reality, policies may help provide much-needed peace of mind if the worst happens.
To find out more about life insurance and policy types, read our life insurance article.
How does life insurance work?
Life insurance is taken out by an individual and they select a cover amount. They pay monthly premiums and, if they pass away or are diagnosed with a terminal illness, the cover amount is paid to their beneficiaries to help them through life without them.
Life insurance premiums reflect the age and medical history of the life assured, as well as the type of policy and total cover, among other relevant factors.
Types of life insurance
There is no one standard life insurance policy. Premiums and cover are personalised to the needs of the policyholder. Some of the most common types of life insurance are:
Level term life insurance
Term policies are designed to cover a specific period, often 10-30 years. If the life assured passes during this period, money is paid out to the beneficiaries, alternatively the policy expires after the agreed period. This is designed to help protect beneficiaries during periods when they have the greatest financial responsibilities.
Increasing life insurance
'Increasing cover' goes up every year on the anniversary of the policy by a pre-agreed amount. This is designed to help protect beneficiaries against inflation and increasing living costs.
Decreasing life insurance
'Decreasing cover' reduces each month until it reaches zero at the end of the term. This is designed to help protect beneficiaries against financial obligations, such as a repayment mortgage, that will reduce with time.
Who needs life insurance?
Life insurance is designed for those with dependents who may struggle financially if they weren’t around. Those who need life insurance may include:
- Long-term partners
- Parents
- Homeowners
Benefits of life insurance
While many people associate life insurance with the sadness of a loved one passing, the reality is that policies provide much-needed financial support – without which, challenging times may become even more difficult.
Understanding the benefits of life insurance can help with coming to terms with the future. These include:
- Peace of mind – that loved ones will be financially supported if the worst happens.
- Financial protection – for dependents against the cost of day-to-day living expenses, mortgage or rent payments or even the cost of your funeral.
- Flexibility – with policies that can be tailored to your needs and financial demands such as increasing and decreasing cover.
Get an idea of how much life insurance you need
Our simple life insurance calculator provides an idea of how much your loved ones would need if you weren't around. Just tell us what you want to protect...
Ready to get life insurance?
Looking for cover and need help choosing a policy that’s right for you? Take a look at our life insurance cover to understand your options.
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