HOW DOES LIFE INSURANCE WORK?

What is life insurance?

Life insurance is a plan that pays out a big sum of money if you, the person with the insurance, die during the time the policy covers. It can also pay out if you get really sick and aren’t expected to live more than a year. The idea is to give your family some money to help them out after you’re gone, like with paying off a house or keeping up their lifestyle.

There are two main types of this insurance: level cover and decreasing cover.

The one you pick changes how the amount of cover and its cost might change over time. They’re made for different money needs. For example, if you want to make sure your mortgage gets paid if you die during the policy, you might choose decreasing cover. This means the value of the insurance goes down over time, but what you pay each time stays the same. This matches how a mortgage usually decreases over time too. That’s why it’s sometimes called mortgage protection insurance.

Just remember, this insurance doesn’t build up any cash value. If you stop paying, your cover stops too. The policy pays out just once and then it’s done.

How much does life insurance cost?

How much you pay for life insurance can change based on a few things:

• Age: Usually, the older you are, the more you pay because there’s a higher chance of health problems.
• Lifestyle: If you don’t live healthily, like drinking a lot or being overweight, it can make your insurance cost more.
• Health: Already having health issues can make your insurance more expensive, especially if it’s a serious, ongoing problem.
• Family Health History: If your family has had serious health issues, it might affect your cost, because you might have a higher chance of getting those issues too.
• Job: Risky jobs can make your insurance cost more compared to safer jobs.
• Smoking: If you smoke or use nicotine products like vapes, you’ll pay more because of the health risks.
• How Long You’re Covered: Longer insurance plans usually cost more than shorter ones.
• How Much Cover You Want: The more coverage you want, the higher your payments will be.

It’s really important to answer the insurance company’s questions truthfully when you apply. If you don’t, it could cause big problems for your family later, like the insurance not paying out when it needs to.

What does my life insurance cover?

It’s mainly there to give your family money to help them out if you die. But, it doesn’t usually cover you if you get really sick and can’t work – for that, you might need something called critical illness cover. What’s exactly covered can be different depending on which insurance company you’re with, so it’s good to read your policy carefully.

And yes, even if something unexpected like a bungee jumping accident happens, the insurance will still pay your family. But remember, it’s all about keeping them financially secure, even if they might be upset about the risky stuff you did!

Can I choose who the money goes to when I pass away?

Mostly, yes, but you need to set things up right.

• Joint Life Insurance: If you have a policy with someone else, like your partner, they usually get the money if you die. But, if you break up, you might be able to change it into two separate policies.
• Single Life Insurance: If it’s just your policy, the money goes into your stuff (called your ‘estate’). If you want a specific person to get the money (a ‘beneficiary’), you might want to put your policy in a Trust. Here’s why:
  • Avoids Tax: Putting it in a Trust means it’s not part of your estate for tax when you die, so no Inheritance Tax on the money given to your family or friends.
  • Faster Payout: If you have other people (trustees) managing the Trust, they can get the money to your family or friends faster.
  • Making a Will: You can also say who gets the money in your will, but it might not be as good for taxes as a Trust.

It’s smart to get legal and money advice if you’re thinking about a Trust or making a will for your life insurance.

Do I need life insurance?

It really depends on your situation.

Ask yourself if you have people like a partner or kids who rely on you for money. If you do, life insurance can be a good way to make sure they have some money to help them out if something happens to you.

The money from life insurance can be used for big things like paying off a house or everyday expenses like bills and taking care of kids.

If you haven’t planned anything for your family for when you’re not there, life insurance might be something you should think about.