Alyssa Lane
Life insurance is designed to pay out a lump sum or monthly income to your dependents when you pass away. The amount of money you pay for life insurance is based on the risk you pose, the probability you'll make a claim, and the amount of cover you choose. There are two main types of life insurance: level-term and decreasing-term. With level-term insurance, your beneficiaries will receive a fixed amount if you pass away during the term. Decreasing-term insurance, on the other hand, pays out a sum that decreases over time, usually in line with a repayment mortgage. This type of insurance is typically cheaper than level-term insurance, as the payout reduces over the course of the policy.
| Characteristics | Values |
|---|---|
| Policy type | Level term insurance, decreasing term insurance |
| Policy term | Shorter terms are less expensive |
| Policy amount | Reduce the amount of cover to lower premiums |
| Dependants | Dependants becoming more financially independent |
| Inheritance tax | Writing policy in trust avoids this |
| Critical illness cover | Available at an additional cost |
| Health | Improving health and losing weight can reduce premiums |
| Smoking | Smokers pay more than non-smokers |
| Age | Premiums increase with age |
| Medical conditions | Certain conditions increase premiums |
| Job | Some jobs are considered high-risk and increase premiums |
| Hazards | Engaging in hazardous pursuits can increase premiums |
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What You'll Learn
When you have no dependants
If you have no dependants, you may still want to consider life insurance to protect those you care about from financial burdens after you pass away. For example, if your next of kin would struggle to cover your funeral expenses, a life insurance policy could provide the funds they need to pay for your funeral service, burial, and other costs.
Life insurance can also be beneficial if you are supporting your parents, grandparents, or other loved ones. If you pass away before your parents or elderly dependants, life insurance may help them recover from the loss of your financial support. Similarly, if you have a sibling or loved one with special needs who will require lifelong financial assistance, you may want to consider life insurance to help provide care for them when you're not around.
If you are a business owner, life insurance can be a way to protect your business and employees in the event of your death. The death benefit could be used to hire someone to replace you, allow your business partners to buy remaining shares, or provide for employees if business performance takes a turn. Lenders will also probably require you to have life insurance and to name them as beneficiaries in the event of your death.
If you are young and single, you may pay less for coverage since life insurance rates tend to be lower for younger people. Getting life insurance while you're young and single can also be a way to qualify for a more affordable policy than you would if you waited until you were older and less healthy.
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When you have a repayment mortgage
If you have a repayment mortgage, you may want to consider decreasing term life insurance. This type of insurance is designed to protect a repayment mortgage, with the amount of cover reducing roughly in line with the way a repayment mortgage decreases. This means that the death benefit reduces in line with the outstanding mortgage balance, so your loved ones can continue living in your family home without the burden of mortgage payments.
Decreasing term life insurance is a popular option for those with a repayment mortgage as it is typically cheaper than level term insurance, with lower monthly premiums. This is because the amount of money an insurance provider needs to cover you for reduces over the course of the policy. However, it's important to remember that this type of insurance is not a savings or investment product and has no cash value unless a valid claim is made. Additionally, it may not be suitable if you have an interest-only mortgage, as the payout may not be sufficient to cover the balance.
When considering decreasing term life insurance for a repayment mortgage, it is crucial to ensure that the amount of cover matches your outstanding mortgage. You should also check the interest rate of any quote to make sure that the cover does not fall significantly faster than what you owe on your mortgage. Furthermore, some lenders may require you to have life insurance when taking out a mortgage, so it is important to review the terms and conditions carefully.
In addition to protecting your mortgage, decreasing term life insurance can also provide peace of mind for your family. If you have children, the amount of money they would need to receive in the event of your unexpected death might reduce as they grow up and become more financially independent. By adding critical illness cover for an extra cost, you can also ensure that your loved ones receive a cash sum if you are diagnosed with a specified critical illness or undergo a medical procedure.
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When you have no outstanding debts
If you have no outstanding debts, you may still want to keep your life insurance policy to provide financial protection for your loved ones. Life insurance is designed to replace your income after your death and can be used to cover living expenses, education, and debt. It can also be used to leave an inheritance or to protect a small business.
However, if you have no debts and no dependents who rely on your income, you may want to consider reducing your life insurance coverage. In this case, you may opt for a decreasing term life insurance policy, which pays out a lump sum that reduces over the term of the policy. This type of policy is typically used to cover a repayment mortgage, where the death benefit decreases in line with the outstanding mortgage balance. The premiums for decreasing term life insurance are usually less expensive than for level term cover, which provides a set amount of coverage for the entire term of the policy.
Another option to consider is guaranteed premiums, which offer the advantage of fixed premiums and a predetermined payout amount. This can help you budget more effectively, as you will know exactly how much you will pay over the term of the policy. However, it is important to note that guaranteed premiums may not be the most cost-effective option, as your premiums could increase over time.
Additionally, you may want to explore alternative debt relief options, such as debt consolidation loans or balance transfer cards, which can help you pay off multiple debts with a single payment. These options can provide lower interest rates and more flexible repayment terms.
It is worth noting that life insurance can also be used for tax-efficient wealth transfer, retirement planning, and charitable giving. Consult a financial professional or licensed insurance agent to tailor a policy that fits your unique circumstances and goals.
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When you are a non-smoker
If you are a non-smoker, you can reduce your life insurance by opting for a decreasing term life insurance policy. This type of policy is designed for people with repayment mortgages, where the amount owed decreases over time. The payout to your dependents will also reduce over time, which means that the premiums tend to be less expensive than level-term cover.
Additionally, if you are a non-smoker, you are likely to be placed in a lower-risk category by insurance companies, which will result in lower premiums. This is because smokers are considered to be at a higher risk of certain conditions and diseases, and thus insurers view them as a greater risk. If you are a non-smoker, you can also consider improving your health in other ways, such as losing weight, which can help to further reduce your premiums.
It is worth noting that some life insurance companies evaluate all forms of tobacco use, not just cigarette smoking, when determining your risk class and premium. For example, pipe smoking or marijuana use may result in higher premiums, even if you are not a regular cigarette smoker. However, occasional cigar or marijuana use, especially in non-smoking forms, might allow you to qualify for non-smoker rates. It is important to be upfront about your usage when applying for life insurance, as inaccurate information could result in a denied claim.
Finally, as a non-smoker, you may also want to consider the length of the policy term. The longer the term, the more expensive the premium will be. Therefore, you could reduce your premium by only insuring for the remainder of your mortgage term or while your children are young, as any reduction in term will keep your premiums down.
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When you are younger
Health and Lifestyle:
Improving your health and lifestyle choices can lead to lower premiums. For example, losing weight, giving up smoking, or reducing hazardous activities can make you less risky in the eyes of insurers and result in lower costs.
Type of Policy:
Decreasing-term life insurance is often a cheaper option for younger individuals as the payout reduces over time. This type of policy is suitable if you have a repayment mortgage or young children, as the cover decreases roughly in line with your decreasing dependants' needs. However, it is important to note that this type of policy may not be suitable if you have an interest-only mortgage, as the decreasing payout may not be sufficient to cover the fixed amount owed at the end of the term.
Length of Policy:
The length of the policy can impact the cost of premiums. Consider whether you need a long-term policy or if a shorter one would suffice. For example, you may only need cover for the remainder of your mortgage term or while your children are young, reducing the term can keep premiums down.
Critical Illness Cover:
Adding critical illness cover to your policy will increase your premiums. While this can provide peace of mind, carefully consider whether you need this extra protection at a younger age, as it may be an unnecessary expense.
Shop Around:
Don't be afraid to shop around and compare policies from different insurers. Each insurance company has its own method of assessing risk, so you may find a more affordable policy with similar coverage by exploring other options.
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Frequently asked questions
The amount of life insurance you buy will affect how much you pay for it, so if you can reduce your life insurance, your premiums can also reduce. You can do this by insuring only for the remainder of your mortgage term or while your children are young, as any reduction in term will keep your premiums down.
Life insurance is designed to pay out a lump sum or monthly income to your dependents when you pass away. The amount an insurer charges is based on the risk you pose, the probability you'll make a claim, and the amount of cover you choose.
Decreasing term life insurance is a cheaper form of policy where the level of payout goes down over the course of the policy term. It is usually taken out to ensure a specific debt is covered, such as a repayment mortgage.
Improving your health, losing weight, and giving up smoking can all reduce your life insurance premiums. You can also consider buying separate policies instead of a joint life insurance policy.
You can choose between level term and decreasing term life insurance. Level term insurance covers a set amount during the entire term of the policy, while decreasing term insurance is cheaper and pays out less as time goes on.
