Life Insurance: How it works

Life insurance is one of the most important purchases you can make in terms of protecting your loved ones, but how does it actually work? Many people end up accepting policies that aren’t necessarily in their best interests – or fail to purchase insurance at all – due to a lack of understanding of how the process works. Here are a few of the basic things you should know before signing up for a policy.

What is life insurance for?

The purpose of life insurance is to guarantee that when you die, a cash lump sum is left behind for the purposes of your choosing. Usually it will be passed on to your partner or children to help them to cope financially in the wake of your passing. It can also be used to help clear any debts that are left behind, to pay towards your funeral costs or to leave a legacy for a charity or cause that you’re passionate about.

How much does it cost?

You will generally pay for your life insurance via a regular premium – usually monthly. This is a small lump sum that is payable from the time you open your policy and thereafter until you die or the terms of the policy expire. There are different kinds of life cover – fixed rate insurance will only cover you for a designated period, while some plans are on-going.

Premiums are calculated by a variety of factors that differ from insurer to insurer. Some take into account your age, and health or gender. Costs can vary from as little as £5 per month to £50 or more. It is possible that if you live a long life and keep up your payments, your premiums will cost you more than the ultimate value of your cash sum. However, the value of the insurance is the peace of mind that it brings knowing that if anything happens, there is a provision to support your dependents.

Can you cash in your life insurance before you die?

As a rule, life insurance has no cash value to you and cannot be claimed while you are living. Some companies offer a terminal illness provision in which you can claim your insurance to help to pay for palliative care. But otherwise the cash can only go to your family or designated charity.

When is the right time to take out life insurance?

As none of us can predict the future, there is considerable value in having life insurance at any age – particularly if you have a partner or children who would struggle financially without your income. Taking out a policy sooner rather than later can also help you to secure lower premiums, making it easier to work the costs into your monthly budget. However, it’s never too late. Some insurers specialise in catering to over 50s, meaning their customers have a better chance of getting good value insurance later in life.

How do I know which insurance company to go with?

There are a great many insurance providers on the market in the UK, all with different products that come with their own strengths and weaknesses. The best thing is to determine exactly what you need from a policy, and find a provider that can help. For example some insurers take your health into consideration while others will ask no medical questions. Others have strong links to funeral homes to help you to pre-plan your final arrangements.

In terms of costs, price comparison websites can help, but remember that not everybody uses them. Take the time to look around and research any company you’re thinking of approaching carefully. If you choose wisely, you should be able to set up a high-value plan that won’t cost the earth and guarantees peace of mind for years to come.