A life insurance policy is an agreement or contract with a company that provides insurance products. In exchange for a monthly payment (or premium) the provider will payout a death benefit; a lump sum payment, when the insured person dies. This payment is given directly to the beneficiaries stated on the insurance document.
- Cover for a specific time frame – You agree with your insurance provider a period of time (e.g. 15 years) where the insurance policy will pay out upon your death.
- Cover for your whole life – The insurance will cover you for the rest of your life.
Within these two categories you can choose a type of cover, including:
- Level cover or Level Term – The amount paid out remains the same.
- Decreasing cover – The amount paid out goes down over time.
- Increasing cover – The amount paid out goes up over time.
You can customise life insurance based on your goals and needs. Life insurance falls in to two main categories – a specific time frame, and whole life coverage. You can read more about this below.
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With some policies you have extra options, either included in the price of your current insurance or available as an ‘add-on’.
- critical illness cover – payment after diagnosis of a critical illness.
- terminal illness cover – payment for diagnosis of a terminal illness.
- life event changes – your cover can be changed if something happens to your situation.
As with all options for coverage it varies from policy to policy so make sure to double check what you are covered for.
I have health insurance – why would I need life insurance?
Health insurance covers you for emergency treatment in the event that you fall ill, need surgery or other types of treatment. Alternatively life insurance pays out in the event of your death, where a lump sum is paid to dependents.
The foundation of life insurance is the recognition of the value of a human life and the possibility of indemnification for the loss of that value. —F. C. Oviatt, Economic place of insurance and its relation to society
Should I take out critical illness cover as well?
Critical illness plans cover specific illnesses and will pay out if you are diagnosed with a relevant ailment and survive a set period of time. Only what is specified will be covered under this policy. This can be added on to your policy but will increase the value.
Am I really covered for life?
If you take out a whole-term policy you will be, but if you take out a set term policy then you will only be covered for that period of time.
Are my family protected by my insurance?
Generally your family is not protected by your personal life insurance policy, but there are group policies available that can cover a whole family. Although not protected by your policy, if named on your policy document they will be the beneficiaries of the money claimed in event of death.
How much will my dependents receive if I die?
This depends on two factors, whether your dependents are listed in your life insurance policy, and how much you are covered for.
When you take out a life insurance policy you will name who receives the compensation. This can be all of your dependents or just your spouse – it is up to you.
As for how much they receive – this varies on the type of policy you take out, whether it increases or decreases over time, or has a set period of time it is valid for.
What is the difference between life insurance and assurance?
Insurance is defined as “coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril” whereas assurance is “a strong and definite statement that something will happen or that something is true”.
The core difference is that insurance is something that might happen, whereas assurance is something that will definitely happen. This is why you sometimes hear it being referred to as life assurance, because death is something that will definitely happen.
Can I invest some of my money that I am paying to the insurance company?
No – once the money is paid to your provider you cannot touch it anymore.
How do the insurers calculate how much I pay each month?
After you decide what policy is best for you you’ll make an application either directly to the insurance company, or with the help of a broker. After you have applied the insurer will need to look at the application and determine whether you are eligible for cover.
You must be honest when filling out the application form. Unfortunately the majority of rejections is due to the form being filled out incorrectly or answers not being completed fully.
After they have assessed your eligibilty they will let you know the cost and what specifically you can be covered for. A number of factors are looked at when determining the cost:
- Duration of coverage
- Level of cover
- If you smoke
The majority of policies require you to pay premiums every month without fail. If you stop paying for even one month the coverage is terminated and you receive no money back. Policies generally last for many years so make sure that you purchase the policy that is right for your circumstances.
What is group coverage?
Group coverage is when a single policy covers a group of people – generally the policyholder is an organisation (your employer) or union. The policy covers everyone in that group. This is generally included in an employee benefit package that the employer provides as an incentive in the workforce.
Because of the collective bargaining power an organisation has when taking out a policy, the premiums are generally much lower than if the individuals would try and take out similar coverage by themselves. If this is offered by your employer than it is definitely something that you should take – especially if you have no other cover. As with individual cover you can name your beneficiaries.
Term coverage is the most common form of a group policy. This is provided yearly and is renewed on an on-going basis. When it is provided as an employee perk than the employer will pay for most or all of the premiums and coverage generally is equivalent to one or two years’ salary.
If your employment contract ends you sometimes have the option of converting group coverage in to individual coverage. This is generally not favourable because of the high annual premiums that result for comparable coverage.