What is life cover?
Life insurance is a type of insurance that pays out a lump sum of money if you die during the term of the policy.
There are two main kinds of life insurance, known as whole-of-life assurance and term insurance. Term insurance pays out if you die within a set time frame.
A whole-of-life policy is a life insurance policy that is guaranteed to remain in force for the entire lifetime of the policyholder, as long as premiums are paid.
Like other life insurance policies, with a whole-of-life policy a lump sum is paid on the death of the policyholder.
How much should you take?
If you have a mortgage, then taking out mortgage term assurance will ensure that your mortgage is repaid when you die.
If you are on a capital repayment mortgage, taking out a decreasing term policy may be best; the pay-outs on these type of policies can reduce over time as the balance of your outstanding mortgage falls, resulting in lower premiums.
If you are on an interest-only mortgage however, a level term life insurance policy will pay out a fixed lump sum when you die, meaning you will know exactly how much you are getting and can clear the outstanding capital balance.
There is also increasing term insurance, which increases its payout either by a fixed amount each year or in line with inflation. This type of insurance is designed to factor in rising living costs. Premiums will also rise as a result, however.
How much should you pay for it?
Life insurance premiums are calculated depending on your history, health and age, among other factors.
For example, a young non-smoker will have lower premiums than an older smoker.
Other circumstances such as marital status and credit score may also be used to calculate your premium.
The amount of cover a person needs will depend on their personal circumstances. Things such as outstanding loans, the number of dependants and income replacement should all be taken into account, as well as how much you can afford to pay each month in premiums.
Are there any alternatives?
There are other forms of insurance which can protect you and your family if catastrophe strikes.
For example, critical illness cover works in a similar way to life insurance, but instead pays out if you are diagnosed with a defined critical illness. This is sometimes available as a combined policy with term life insurance.
Income protection insurance can also help replace loss of earnings due to ill health, or accidental injury. The policy will pay out until you either start working again, retire, or die, or the end of the policy term.