Guide to buying life insurance

While it might not be the cheeriest of subjects, life insurance could protect your loved ones in the event of your death, providing them with security when they need it the most.

Guide to buying life insurance

Choosing the right policy can seem a daunting task, however, and if you are unsure about what to buy, here's a rundown of the different types available, as well as tips on the dos and don'ts.

Level-term life insurance
Term assurance, which pays out if you die within a set timeframe, is the most basic type of life insurance. With a level-term policy, the lump sum that is paid out in the event of your death remains the same throughout the set term, which means your premiums will usually stay the same too. It's a good option for those who want to leave a lump sum behind for their loved ones.

Decreasing-term life insurance
The second type of term assurance is a decreasing-term policy, where the amount you are covered for gradually decreases over the course of the policy term. Its purpose is really to cover a debt that is also decreasing, such as a repayment mortgage. The benefit is that premiums are usually cheaper than for level-term cover.

Family income benefit life insurance
Also a type of decreasing-term policy, family income benefit life insurance pays a regular income instead of a lump sum to your family after your death, but only until the end of the fixed term. The problem with this type of cover is that if you die shortly before the end of the term, your family will only receive an income for a short amount of time.

Whole-of-life insurance
As you would expect, whole-of-life policies usually come at a much higher price than term assurance policies. The upside is that it is guaranteed to pay out whenever you die.
Joint versus separate policies
Joint life insurance policies are available, but experts generally recommend two separate policies. The difference in cost is often minimal and having two policies means a payout when each party dies, rather than one payout when the first person dies. Therefore, if you have children and are hoping to provide for them when you pass away, two policies is the better option.

Other considerations
Whatever type you choose, there are a number of considerations to take into account. For instance, it is worth thinking about an index-linked policy, which keeps track of inflation, meaning your payout won't decrease in value over the course of the term.

Those leaving a lump sum should also consider putting their life insurance into a trust, otherwise it will be deemed part of your estate when you die and will be subject to inheritance tax.

Lastly, a healthy lifestyle could significantly reduce your premiums. The healthier you are, the less of a 'risk' you are to insurance companies - if you are overweight, drink heavily and smoke, you're likely to pay the price when it comes to insurance. Quitting smoking for a year could make a dramatic difference to the cost of your insurance so it's worth kicking the habit.

However, don't be tempted to lie about your health and habits - if it becomes apparent that you have been economical with the truth, your insurer may not pay out.

If you are in any doubt about what type of life insurance to buy or what type of cover is best for you, it's best to speak to an independent financial adviser.
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