This is the kind of topic that gets people shifting uneasily in their seats at the dinner table. It’s in the same category as politics or how much you earn – awkward. That awkwardness comes from the fact that Life Insurance is basically thinking about death. And death, as a category, isn’t high on most people’s lists to talk about. Serial killers, maybe. Or Funeral Directors. Yes, let’s go with Funeral Directors (and pretend that our first thought wasn’t serial killers.)
The thing is, life insurance, despite the morbidity that it implies, can be a positive thing for a family, and can make a huge difference to people. If you’re the key earner in your household and you die, life insurance can be used to help pay off the mortgage. It could go even further – paying off the mortgage and providing monthly income to cover your family’s expenses. You and your partner could even take out a joint policy to help the people you’ve left behind to cope financially. All of this not only helps your family, but also give you peace of mind.
How does life insurance work?
Like most forms of insurance, you pay an ongoing premium. This is a monthly payment and it means that you’re covered from the moment you sign up. The insurance company is gambling that you live a long and healthy life, allowing them to collect enough premiums to cover their outlay before you die (or before the policy expires – more on that later). If you die early, they’re out of pocket, as they haven’t collected the premiums required to cover the amount that your family will receive. Oh, and you’re also dead, so there’s no real winner in that scenario!
What other factors are taken into consideration?
A lot. If you’re a hard livin’ hard drinkin’ cowboy who smokes, is a gunslinger by trade, and your cowboy folks both died young from diabetes (brought on by moonshine), then you may find your monthly premium comes with quite a high mark up. The insurance company will see you as a big risk, and the price you pay will reflect that. On the flip side, if you’re a yoga-loving vegan with normal blood pressure, no history of illness and you don’t smoke or drink, that’s going to be reflected in the price you pay too. Quite simply, lifestyle matters.
But it doesn’t end there.
Because while whether or not you smoke and your own personal health history seem like obvious considerations, there are a lot of other factors in play. Some you might expect, some you might not. Perhaps the most important influence on your premium, for example, is your current age. All things being equal, the younger you are, the less likely you are to die. Therefore, the lower your premium will be.
And what about your weight? Well, if you’re overweight based on a simple measure like BMI (body mass index), then you’re more of a risk, as your chance of developing a health problem is statistically higher. And what about your occupation? Masseuse? Thai Chi teacher? You’re probably not going to see a spike in your premium when you put that down. Motorbike racer or professional bungee jumper? Well, the insurance companies are going to see you as a risk. In fact, if your job carries a significant enough risk, you might even find yourself denied coverage. If you are, perhaps it’s time to rethink what you get up to do on a Monday morning!
It might be the mix…
We’re still not done, because as well as the factors we’ve described above, we’ve also got how those factors are combined. For example, the combination of being an overweight smoker could affect your rate more than any single other factor. And as different insurers will consider you in different ways using a combination of their own policies and statistics, you’re likely to get a range of premiums.
This tells us two things. First, that there is no such thing as a standard policy – it will truly be tailored to you. Second, that it pays to shop around (or have a team of friendly Norwich-based financial advisors do the legwork for you!).
Your decisions come next
So far, we’ve only really talked about how the Insurance Companies’ ranking you as an individual will affect the price you pay, but there are a lot of different choices for you yourself to make during the process. For example, you need to decide on the actual policy that you require. Essentially, the longer the policy lasts (because you can specify a number of years for the policy to last or have it covering your whole life) and the larger the payout that you require upon your death, the more it’s going to cost you. Why’s that? Well, the risk that you will die while you’re covered by the insurance is much higher if you’re covered for a bigger number of years. And, of course, the more money you need to come out of the pot at the end, the more you put in at the beginning.
There you have it. As you can imagine, there’s a lot more to this topic, so in the same way that we’ve helped you understand the basics of pensions and investing, we’re going to spend quite a few of our upcoming blogs helping you understand Life Insurance.
As always, if this has led to more questions than answers, we’re only a phone call away.
This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.
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