Life insurance is a type of coverage that will pay a lump sum of money to whoever is stated on your policy if you pass away or fall terminally ill. It aims to deliver financial support to your loved ones when you’re gone, meaning it can protect critical assets, such as your home, and/ or preserve their standard of living.
What Does Life Insurance Cover?
Life insurance will cover most bills that are needed to provide healthy living for your loved ones, from everyday living all the way to mortgage payments.
Below are a few examples of what you’re able to expect life insurance to cover.
- End-of-life expenses: Within most life insurance policies, you’ll be able to spend the insurance on such things as your funeral or burial expenses.
- Everyday bills: It can also aid your loved ones with bills they pay on a monthly basis. These bills can range from car payments to school supplies.
- Mortgage payments: If you’re living with a spouse or family member, you’ll be able to support them with continuous mortgage payments when you’re gone.
- Debt payments: The likelihood is that your most significant debt is your mortgage. However, in the unlikely event that it isn’t, this insurance will also aid your loved ones in paying your debts off, too.
Life Insurance Policy Types
Within life insurance, there are two policy types: Term life and whole of life. Each coverage provides a different set of benefits depending on the individual’s lifestyle. Below, we explain both types in more detail.
Term Life Insurance
Term life insurance is simply coverage that lasts for a set period that you’re able to choose while purchasing your policy. This is typically 5, 10, or 25 years. If you were to die during this period, whoever you selected to receive the compensation would obtain it.
According to Best Life Rates the popularity of term life insurance has increased over the years. This is because it offers larger pay-outs than a whole-of-life policy and normally has lower premiums. The only downside from being covered by term life insurance is that you’re only insured between a certain timeframe. If you pass after this, your loved ones will not receive any compensation.
Why would you want to opt-in for term life insurance?
- You want to provide for your children, even if you were to pass by paying for such things as their education.
- If you have a mortgage with a partner who cannot pay it on their own, you may want to assist them even when you’re gone.
- You’re unable to afford the high premiums that permanent life insurance offers, but you still want to be covered in the event of dying.
Can you switch a term life to a whole of life policy?
Depending on your provider, you may be able to change your term life insurance policy into a whole-of-life policy if you ever want to make the switch. They call these convertible policies, and it simply lets you change your term life insurance into a whole-of-life policy whenever you want. However, doing it this way means you’ll pay a higher rate than if you were to purchase whole-of-life insurance straight of the bat.
Whole Of Life Insurance
Unlike a term policy that will only offer a payout if you pass within the set time stated on your insurance, a whole-of-life policy, as suggested by the name, will cover you for your entire life. This well-known life insurance is a much better alternative to a term policy, but you’ll end up paying much higher premiums for this.
With a whole-of-life policy, the value of your potential compensation will grow as you age. This is because (depending on your insurance provider) they’ll invest a portion of your cash value and it’ll increase over time. Meaning the sooner you purchase a whole-of-life policy, the more likely your loved ones will receive a more significant amount of compensation.
Can you withdraw money against your life insurance policy?
A whole-of-life insurance policy is highly flexible. With this policy, you’re able to benefit from it while you are still alive. For example, you’re able to borrow or make withdrawals depending on your policyholder. You can also opt-in for something insurers call a surrender policy.
This simply allows you to trade your death benefits for the total amount that is in your account, minus any legal or transaction fees. However, choosing to surrender your policy can cause complicated tax issues. If you’re going to this, I recommend you seek a financial adviser first.
Why Wouldn’t A Life Insurance Policy Pay Out?
However, like most insurances there are also exclusions. These include, but are not limited to, the below:
- If the policy holder’s deaths are due to drug misuse or alcohol.
- If your death is the result of any involvement in war or terrorism.
- If the insurer’s death occurred due to suicide or self-inflicted injuries.
- If your death was the result of a reckless act.
We hope you found this article useful and that it answered any questions you may have had on life insurance!
James Banerjee is a Senior Account Manager who graduated from the University of Kent in 2014. He works in SEO on clients such as HSBC UK and Nestle and he has a keen interest in personal finances and money-saving advice.