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How to Choose a Life Insurance Plan

The death of a loved one causes significant emotional distress. It can also have a devastating financial impact. By choosing the right life insurance plan, you can ensure finances don’t become problematic for your loved ones after your death. Here’s a quick look at how to choose a life insurance plan that works for you.

The death of a loved one causes significant emotional distress. It can also have a devastating financial impact. By choosing the right life insurance plan, you can ensure finances don’t become problematic for your loved ones after your death.

Here’s a quick look at how to choose a life insurance plan that works for you.

Why Should You Have Life Insurance?

If you’re uncertain whether getting life insurance is the right decision for you, consider the benefits it can provide you.

Life insurance policies:

  • Provide financial security for loved ones. When you’re in a relationship or have children, your death can cause a significant financial disturbance. Life insurance could help ensure your loved ones can pay bills and not have to worry about money in the immediate aftermath of your death.
  • Give you and your loved ones more peace of mind. Thinking about your own or another person’s death is not a light topic. However, you can feel even more anxious if you have to worry about the financial impact it will have. Dealing with the immediate shock of losing a loved one is a bit easier if you know that money isn’t something they have to worry about.

Having a life insurance plan gives you a sense of security. Your loved ones won’t have to worry about things like funeral costs and household bills. Their immediate financial future is secured.

What Type of Life Insurance Should You Have?

While all life insurance policies tend to provide similar benefits, not all life insurance plans are equal. You can find various types of life insurance policies, and you can make a more informed choice if you understand the differences.

Life insurance policies come in two main types:

Level Term Insurance

Your life insurance policy can come with a pre-agreed term. You’ll usually have three options for these types of life insurance policy:

  • Level term insurance is valid for an agreed term, and pays out at the time of your death. The assured sum is the same throughout the existence of the policy.
  • Decreasing term insurance is cheaper to take out because the assured sum decreases over the term, usually in line with your mortgage. Even when you clear your mortgage, you might still want to ensure your loved ones receive a small lump sum and this is possible with your policy.
  • Increasing term insurance works the opposite way of decreasing term insurance. The assured sum goes up over the years, and the increase can be a fixed amount or pegged to the Retail Prices Index measure of inflation. If you want to make sure you leave behind enough to cover your family's expenses, these policies help you do that. You can calculate your current spending when taking the insurance and know that the assured sum will continue to reflect the cost of living in the future.

The average terms for level term insurance tend to range from 10 to 25 years. However, you can specify the length of the plan you want, and it is possible to find policies that have longer terms, sometimes up to as long as 50 or 55 years.

The main point to remember about level term insurance is that the policy expires at the end of the term. If your level term insurance is for 25 years and you're alive when the policy ends, you won’t receive a payout. Level term insurance typically expires before your 80th or 90th birthday, depending on the provider. Your family might never benefit from these life insurance policies as you might outlive your plan term!

Whole-of-Life Insurance

With a whole-of-life policy, your life insurance has a whole-of-life term which means your dependants get a payout no matter when you die. Whole-of-life insurance is often more expensive than level term insurance. However, it guarantees a payout for your family when you die.

Over 50s Life Cover

It’s worth mentioning here that many providers offer a specific over 50s life cover. As the name suggests, it’s only for those over-50. There is a maximum age limit to take out such a policy, which is typically 75. The policy pays a lump sum to your loved ones in the event of your death, and it can come with affordable premiums. This type of life insurance is generally used to help your family pay funeral costs and any small, unpaid outstanding bills.

The most common terms and conditions of over 50’s life cover include:

  • You don’t need a medical, even if you’ve had medical problems in the past.
  • Available even if you currently suffer from ill-health.
  • You’ll have a waiting period at the start during which claims cannot happen. The period often runs for 12 or 24 months.
  • The cover works similar to whole-of-life insurance, so there is no end date.

Should You Choose a Joint Life Insurance Policy?

You should also keep in mind that your life insurance policy can be a single policy or a joint policy.

Single life insurance policies exclusively cover you. However, you can get a joint life policy for two people. If you have joint life insurance, the policy pays out when either or both of you die. You decide if you want the joint policy to payout on the first death or the second. Keep in mind that it’ll only pay out once; either after the first death or only after both policyholders have died.

Things to Consider When Choosing Your Life Insurance Policy

You should focus on three key considerations when picking your life insurance plan:

Your Cover Needs

You might need different things from your life insurance if:

You Are Married or in a Relationship

If you are married, you might want to consider how your life insurance could support your partner with bills and other expenses after your death. If you live alone, you don’t necessarily need your life insurance to cover anything outside of funeral costs, for example.

You Are the Main Breadwinner

Having life insurance cover the loss of your income is especially vital if you’re the breadwinner of the household.

You Have a Mortgage

If you are still paying a mortgage, then having your life insurance cover the continued cost of it can be essential. Your life insurance can ensure your loved ones don’t need to sell the home after you die. As mentioned above, decreasing term life insurance is often the best option for these situations. Your partner can use the life insurance payout to clear any remaining mortgage payments.

You Have Children or Grandchildren

You might not need to worry about providing them with a huge sum, especially if your children are grownups and your estate will see them inherit other things, like property. However, you can use your life insurance to pay funeral costs and give the kids a lump sum to inherit.

You Want Security Against Falling Critically Ill

You should also consider adding an optional extra to your life insurance cover called critical illness cover. It pays out a tax-free lump sum in the event you are diagnosed with a terminal illness. The cover includes serious illness such as cancer and having a stroke, as well as accidental injuries. The payment can be used to pay expenses ranging from the cost of private medical treatment to paying off your mortgage. It allows you to take care of your affairs before you die, as well as help you make decisions on and pay for any care you require.

The Cost of the Policy

Of course, the cost in the here and now should be something you keep in mind as well. You don’t want to opt for a life insurance policy you can’t afford.

Comparing different options is crucial. For example, a joint life insurance policy could be a cheaper option for couples, depending on your lifestyle and other expenses.

Affordability isn’t just about monthly payments, either. You should keep in mind the kind of sums your policy will payout. You don’t want to keep paying for a policy that is insufficient to cover the needs you’ve identified. Always calculate and consider the payout when thinking about affordability.

Multiple factors determine the cost of your life insurance. The two key factors are the scope and the length of your cover. The wider the scope and the longer your policy is in place, the higher the cost.

But you should keep certain other factors in mind as well. These include:

  • Your age.
  • Your health and family medical history.
  • Your lifestyle.
  • Your job. Those with hazardous jobs will often pay higher premiums.

It’s possible to decrease the cost of your policy with small lifestyle changes. For example, non-smokers often pay less for their life insurance than those who smoke. Those with a lower BMI might also benefit from lower premiums. You must be honest. Lying about things like past health issues can create more damage than good. You might have smaller premiums, but your insurer might invalidate the insurance if they find out you lied.

Life Insurance and Inheritance Tax

If you have children and you want to leave behind an inheritance, you should be aware of life insurance payouts and tax. You can protect your life insurance from Inheritance Tax by placing it in a trust.

Life Insurance Policies – The Bottom Line

Finding the right life insurance policies can provide you and your loved ones with essential benefits, peace of mind, and support when they need it most. However, to make the most out of the financial security life insurance can provide you with, you have to spend time looking for the right deal. Always consider you and your family’s needs and compare different options before purchasing a plan.

Krista Lomu

Krista Lomu

Krista has been writing about finance for nearly a decade. Based in London, she hopes to turn even the most complicated topics to approachable and interesting for readers. When she's not writing and working with small businesses, she likes to read, watch football and play games - fuelled on by many cups of coffee!
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