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What is life insurance and when do you need it?

Put simply, life insurance pays out an agreed amount if you die during the term of the policy. You’ll make regular monthly or annual payments (known as premiums) over a fixed period, and if you die during that time, the policy will pay out an agreed cash lump sum. It’s not an investment or savings plan so if you survive the term or cancel your policy, you aren’t entitled to anything back.

Do you need life insurance?

Only four in 10 UK families have life insurance according to The Aviva Family Finances Report (2015), meaning many remain unprotected with no guarantee that they’ll manage financially if either parent was to pass away. However, it could be the most important financial product you buy.

If your children, spouse or any other relatives depend on your income, life insurance can put your mind at ease that they’ll have some financial support if you’re no longer around. It helps if your family relies on your income to pay for household bills, mortgage costs, holidays or even day-to-day living costs like school uniforms, swimming lessons, childcare or running a car.

You might consider taking out life insurance when you get a mortgage, or if you’re expecting a baby.

So how does it work?

The cost of cover varies depending on the insurer’s belief about how likely you are to make a claim. But for all customers, the premium is fixed at the start, so you can be certain as to what you will be paying each month.

Generally, insurance companies offer you two types of cover – level term or decreasing term. Level term life insurance provides a specified amount of cover that doesn’t change over time – it’s fixed throughout the lifetime of the policy and is often used to help pay off an interest-only mortgage or to pay for ongoing living costs.

Decreasing cover, on the other hand, offers a cash lump sum that reduces over the life of the policy. This type of cover is often chosen where you have a repayment mortgage. By choosing a term and sum insured in line with your mortgage, if a claim is made, the lump sum paid out will be broadly in line with your remaining mortgage balance.

What will your premiums be based on?

The cost of life insurance is determined by various factors such as age, health, medical history, lifestyle and occupation. For example, generally speaking the younger you are, the cheaper your policy will be. It’s worth noting that certain hobbies and activities will be taken into consideration and may affect your premiums. Your insurer will also take into account the amount of cover you’d like and the length of the term it’s taken out over.

Whichever policy you decide to take out, it’s important to be honest and accurate in your application. You must answer all questions fully, including any pre-existing medical conditions. If you don’t, your dependants won’t be guaranteed a pay out in the event of your death.

What about critical illness cover?

Critical illness cover is not usually included within your life insurance cover, but can be added for an additional premium. It covers you for serious injuries or medical conditions specified within the policy. Many policies will cover permanent disabilities as a result of injury or illness and diagnosis of a critical illness.

The right type of life insurance for you will be dependent on your own individual needs and circumstances. Whether you arrange for standard life insurance – or add on extra cover such as critical illness – it will give you peace of mind that your family’s financial future is safer if you’re no longer around or well enough to look after them.