How Does Life Insurance Work?


Most people already have a reasonable idea of what life insurance is all about. However, there are some aspects of how life insurance works that are definitely worth brushing up on if you are planning to get a quote anytime soon.

The Different Types

The very first point we need to cover is around the two different types of life insurance you can choose from. While they both have plenty in common, there are enough differences between them to make it important that you know how to distinguish them.

First of all, term insurance is the simplest kind of cover you can get. This is the sort of life insurance policy many people take out to cover their mortgage. With term cover, if the person who is being covered passes away before the end of the chosen term of cover, then the policy will pay out the amount for which you are insured. If you outlive the policy end date, then the policy simply ends without paying out.

Then we have whole of life assurance. Whole of life assurance runs until the insured person dies and is therefore guaranteed to pay out at some point, hence it being called assurance instead of insurance. There are several different types of whole of life assurance policies including Non-profit, with-profit, unit linked and others. Whole of life assurance is usually more expensive than term insurance because of the guaranteed payout. Whole of life policies will also usually carry some kind of surrender value if you decide to terminate the policy early, though this surrender value is usually less than the premiums you will have paid into the policy, this being especially true during the early years of the policy.

The first decision you have to make when getting a life insurance quote is which of the above types of cover is going to be right for your needs. There are also different variations of both ‘term’ and ‘whole of life’ insurance depending on whether you want the insured amount to increase, decrease or stay the same over time but this is probably best explained in a more in-depth post which we will bring to you soon.

How Is the Cost Worked Out?

The simplest way of explaining how the cost of life insurance is worked out is to say that the younger and the healthier you are, the less the cost of cover is likely to be. It sounds a bit morbid but the less likely you are to die the less you will pay to insure your life. This is why it is always advisable to get insured as soon as you can, in order to take advantage of the best rates.

As well as the age factor, your ongoing health situation is also very important. If you get diagnosed with a serious medical condition before you get covered then you could find it more difficult to get a life insurance policy later on. Even if you can still get covered, it might be more expensive or the insurance company might decide to exclude anything related to your existing condition. To calculate your premium there are a number of factors to look at. Bearing in mind the likes of your age, gender, lifestyle and health, the insurer will work out the risk to them of insuring you and will give you a premium quote based on this. Term life insurance should always be cheaper than whole of life insurance because it only covers a set period, so there is no guarantee that it will ever pay out.

Why Get Insured?

People often start to think about getting life insurance arranged when something major in their life changes. This could mean getting married or having children, for example. When either of these things happens to you there is no doubt that you will want to feel the security of knowing that your family is covered if the worst happens to you. In addition, when you take out a mortgage your bank or mortgage broker will often suggest that you get your life covered as well. These are all important moments in your life and it is an extremely sensible idea to take out life insurance at any of these times. However, that doesn’t mean that there is any need to wait for these life changing moments before getting covered. As we have already seen, it is generally cheaper and easier to get life insurance when you are younger and before you come across any health problems. This would also mean that you are fully covered and ready to move forward in life without having to worry about this issue.

When did you first decide to find out about life insurance and what made you do so?

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