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Buying life insurance



Buying a life insurance policy can be confusing. Find out what types of policy are available and the most important questions to ask before buying life insurance.

Do I need life insurance?

A good starting point is to ask yourself whether you actually need life insurance. If you have financial responsibilities and dependents it is important for you to have something in place in order to protect you and your family in the event of your death. The key benefits of life insurance are:

  • Life insurance provides a payout for loved ones, either as a lump sum or a regular monthly income
  • The life insurance can be used for general living costs or be put towards unpaid debts, such as a mortgage
  • Some policies are designed to contribute toward funeral costs
  • Critical Illness can be added on to help towards lost earnings
  • It can give you peace of mind that your loved ones are looked after

Based on you deciding that life insurance would benefit your family, you really need to know and understand what you need and ensure that it matches what you are buying. 

Does your job already give you life insurance?

Many employers offer “death in service” as an employee benefit. If you die whilst employed, your employer will pay a lump sum to your chosen beneficiary.   Some people might assume that they do not need life insurance due to their “death in service” payment, but it is important to calculate how much you need and how much your “death in service” benefit is worth. It might be necessary to take out an additional life insurance policy to make up any shortfall.

How much life insurance cover do I need?

The main objective of life insurance is to cover the lack of income when you are gone. You need to consider paying off any outstanding debts and be able to provide for general living costs. The general rule is to cover 10 times your salary. 

How long should my life insurance policy last?

Most policies run between 10 to 25 years, but you need to consider your individual circumstances. The length of your policy might run alongside your mortgage or be influenced by the age of your children, etc.

What type of life insurance is best for me?

It is important to understand the different types of insurance policy available and select the policy that is best for you: 

Whole of Life Cover

This is an insurance policy that continues throughout your life. You pay a premium every month and the policy pays out a lump sum when you die.

  • Non profit whole of life insurance policies – Premiums are fixed and there is a guaranteed payout upon death.
  • With profit whole of life insurance policies – Premiums are fixed, but the payout is dependent on the performance of investments.

Term Insurance

Term life insurance covers you for a fixed period. If you die within this period, your dependents will receive either a lump sum or monthly payments.

  • Level Term Insurance – Pays out a fixed amount if you die during the term of your insurance. By providing a lump sum, you know exactly what your dependents will receive. 
  • Decreasing Term Insurance – The insurance payout decreases over time. Decreasing term insurance policies are designed to run alongside large debts such as a mortgage or your dependent children coming on age. Due to the payout reducing over time, the premiums are lower than the premiums associated with a level term insurance policy. 
  • Increasing Term Insurance – An increasing term insurance policy is also known as an index linked life insurance policy. The payout increases over time in line with inflation, this maintains the real value over the life of the term.

What information do I need to provide?

When applying for life insurance, you will be asked for certain information, such as height, weight, date of birth, lifestyle habits and complete a health questionnaire. Some life insurance providers will accept your answers to health related questions, but many providers will want you to undertake an actual medical examination.

Does the policy include critical illness cover?

Critical illness cover will pay out a lump sum if you are diagnosed with certain illnesses outlined in the policy. State benefits might not be sufficient to replace your income if you are diagnosed with a serious illness and unable to work. If this is the case, it is worth asking whether critical illness is already covered in the policy or whether you should consider increasing your premiums to get this benefit added. 

Should I place my life insurance policy in a trust?

Life insurance policies can be put in a trust. One of the biggest advantages of a trust is that it is not classed as part of your estate, therefore it is not subject to inheritance tax. Plus, the payout process is much simpler, with your dependents only needing to provide a death certificate in order for the insurance company to pay out.  

Don't forget...

If you are taking out a life insurance policy, do make sure your family are aware of the life insurance policy. 

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