Thursday, 30 July 2020

How Does Life Insurance Work - 7 Things To Know

In this article, I'm going to be talking about all the things that you need to know about life insurance. Recently, I wrote an article where I talk about Different Types Of Life Insurance - (The Beginners Guide). You can check it out. But this article is a little bit different. Because I am going to show you how life insurance work.

Let's get started

1. What Is Life Insurance?

Well, it's basically just insuring your life, so you're insuring yourself. If you think about car insurance or insuring your car, home insurance, you're insuring your home. If things happen to either your car, maybe you get in an accident or something happens at your home, maybe there's some damage to the building from something, the insurer is there to pay out a sum of money to essentially cover the costs of that damage. Life insurance is a very similar thing, it's saying, we going to insure your life so that if the worst should happen, and you sadly pass away, the insurance company would pay out a sum of money to your loved ones, to your family, so that it can ease the financial burden that they're facing. 

If you pass away, they're going to lose your income, they may have debts to pay. So having a lump sum amount of money from the insurer, can help to just ease that financial strain, it can help to cover the debt, and various other living costs so that their lives can continue as normal, financially, they can maintain their lifestyle.

2. How Does Life Insurance Work

We've touched on it already, but it pays out a lump sum amount of money to your family, to your loved ones, and if the worst happens, and you pass away. 

3. What Are The Different Types Of Life Insurance

We have already covered that in this article 
Different Types Of Life Insurance - (The Beginners Guide)

There are two main types

Term Life Insurance 

  • Pays out  if you die during the term (within the set period of time)

The way these policy works is it covers you for a set term and is just a period of time. say you decided, you wanted your policy to pay you out $100,000, and you purchased a term life insurance policy, you would need to decide how long your policy would cover you for? So you might say 25 years, so the way that policy would work is, it would pay out $100,000 if you died within that 25 year period and only that period. 

Whole Life Insurance

  • Pays out whenever you die

It covers you for the whole of your life, so it pays out whenever you die. In that way, you're guaranteed to get a payout with this policy. You don't have to die within a set term, it just pays out when you die. whenever that is, and suddenly, we're all gonna die so it's guaranteed to pay out a sum of money. 

4. Do I Need Life Insurance?

One of the most common reasons that people buy term life insurance is to pay off debt, particularly mortgage debt. You know that you have a large amount of mortgage debt that you have to repay, and for many families, they are reliant on both incomes, your income, and also your partner's income to pay things like the mortgage off. If something terrible happened, and you died, your income would be lost, that then means that your partner may be left to pay this mortgage without your income. Would your partner struggle to pay the mortgage in that scenario? that's a question it's worth asking yourself, and if the answer is, yes, they would struggle with just one income to pay their mortgage. Term life insurance is a really good option. if you die within the period of time that you're paying off your mortgage, then your partner gets a payout, and they can use that money to pay off the remaining mortgage debt, so that they then have no debt, and they don't have to make those monthly repayments.

You kind of see where life insurance ease the financial strain in any financial stress, that your partner may be left with if you were to pass away. But even if you don't have debts, term life insurance can still be important, so that money from the life insurance policy could be used to cover all sorts of things, it could be the ongoing bills, the monthly expenses, those payouts can be used for anything. That's another point worth knowing is, a life insurance payout does not have to be used for any particular thing, it's your decision how you use the money, and it's your decision why you purchased the policy.

Whole life insurance, on the other hand, tends to be bought for different reasons as to term life insurance. Probably the main reason that people buy whole life insurance is to cover their funeral costs, funerals are becoming increasingly expensive, and many people don't want to think about their family having to cover the cost of their funeral, so they might buy a small whole of life insurance policy that pays out some of the money to cover the cost of the funeral, again, to kind of relieve any financial stress, and an already stressful time emotionally.

5. How Much Life Insurance Do You Need

This is not an easy question to answer, and it varies by person to person. Loads of things need to be considered when you're looking at how much life insurance you need. Level of debt, the size of your mortgage might be one thing you need to think about, you might want to think about how much of your family's living expenses would you like this money to cover?. Because that will impact the level of insurance that you take out. If you want your life insurance to pay for your funeral, then you'd want to factor that money into the level of cover as well, so there are loads of things, if you have children you might want to think about paying for their education perhaps you want to pay for their university fees for example, so that would be factored into the level of cover you need to choose. Or simply maybe you just want to leave some money behind for your children when you pass away, so again, the figure that you have in mind, the amount of money you want to leave behind, it would be factored into the level of insurance that you take.

As you can probably tell when it comes to working out the amount of life insurance you need it's not simple. What I would probably say is, if you are unsure about how much life insurance you need, I would suggest going, and speaking with an insurance advisor, they are qualified professionals they'll be able to look at all of your circumstances, and your financial situation, and help you to calculate exactly the level of life insurance you need.

6. How Do I Buy Life Insurance

There are a number of routes you can take, you can go straight to the insurer, direct to them if you have an insurer in mind that you would like to get a policy with, you can just pull them up and they will get that sorted for you. Another route, if you're not sure on a particular insurer that you want, you could go on a comparison website so these are the typical websites, Moneysupermarket, comparethemarket, and what these will do, is they will ask you some information about yourself, and they will then return insurance policies ranked by price. You will see at the top of the charts, the cheapest life insurance going, and as you go down, the policies will get a bit more expensive. 

The third option which is something I touched on before, if you can, of course, go to an insurance advisor, and these are professionals who understand the whole insurance market, they understand what different insurers can offer, and also, how the policies differ. Because insurance policies do have differences in them, and sometimes it can be a little bit confusing and complicated to understand exactly what those differences are, there's quite a lot of the technical information in there where insurance advisors can help is just to simplify all of that, help you understand what certain policies cover, and also, what prices there are associated with the different policies. As I touched on before, Insurance Advisors will be able to understand your personal circumstances, your financial situation, help you work out what type of insurance policy is right for you, the level of cover that you would need, and can help to find the best insurer to see your specific needs.

7.  How Much Does Life Insurance?

Lots of people expect life insurance to be way more expensive than it actually is in reality. If you're thinking about getting some life insurance, but you're worried about the cost of it, I would just suggest, go and have a play around on some of these comparison websites, and you'll see that what actually cover is probably a bit cheaper than you expected. 


I know this is a morbid topic. But it's something that I'm really passionate about because not many people buy life insurance. And it's only when bad things happen that people think about life insurance, and at that point, it can be a bit too late. If you have a partner, if you have children, life insurance is so important to at least think about, and particularly, if you have debts, or if you are reliant on two incomes to cover debts, and also ongoing kind of monthly bills, and expenses.

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