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Life Insurance, the Universe, and Everything
You may have noticed that life insurance is coming back into fashion. It's true that it may not be the financial term on everybody's lips, but sales of life insurance have been going up, according to the Association of British Insurers. Whilst we may not be saving the volume of funds that the financial institutes would like, we are at least flirting with the idea of becoming a little more protective with our finances.
If you have yet to consider taking out any life insurance, don't worry -there's plenty of information out there including consumer organisations such as which? and moneynet. Start with some simple, easy questions such as:
* Would my dependents need a lump sum, such as to pay off the mortgage?
* Will they need a replacement income?
* Should my partner and I both take out life insurance?
You need to ensure whatever life insurance cover you take out accommodates funeral expenses, an emergency fund to encompass household expenses in the short term, repayment of the mortgage, repayment of any other loans, inheritance tax, bequests in your will to people - in addition to your dependents, any other possible lump-sum expenses.
Life insurance broadly falls into two categories: term life insurance (protection only) and investment type. Term insurance is the cheapest type of life insurance and provides a pay-out if the person / policy holder dies within a selected period of years. If you survive beyond the given period of years, then no pay-out is given.
Investment insurance advises that you should choose a whole-of-life option which is a form of investment type policy. Whole-of-life insurance provides cover for as long as the policy holder lives. The policy must eventually pay out and therefore builds up an investment value which can be cashed in by surrendering the policy. However, it often takes many years for a surrender value to build up and in general, whole-of-life policies are expensive if your main requirement is protection, the same is true endowment policies. Endowment policies are investment insurance products which pay out upon the death of the policy holder and also if they survive.
If you're considering term life insurance, bear in mind there are multiple variations encompassing increasing term insurance, increasable term insurance, decreasing term insurance, renewable term insurance, convertible term insurance, family income benefit insurance and pension linked term insurance.
Increasing term insurance
Increasing term insurance is just like basic term insurance, except that, as the name suggests, the level of cover increases - typically alongside the premiums. This policy is suitable for long-term insurance as increasing prices reduce the value of a fixed level of cover over policy period.
Increasable term insurance
Increasable term insurance provides the option of increasing the level of cover either at specific intervals (such as anniversary of policy start date) or specific events (such as marriage or birth of a child). Premiums increase for additional cover, but they are based on your health at the start of the policy, even if it has since deteriorated.
Decreasing term insurance
Decreasing term insurance reduces cover year on year, with the policy holder usually requiring the cover for loan repayments such as a mortgage or to cover a potential inheritance tax bill.
Renewable term insurance
Renewable term insurance gives the policy holder the option to extend the insurance term when it comes to an end; the premium paid is the same at the start of the term, in spite of any deterioration in the policy holder's health.
This may be beneficial to parents whose children stay in full-time education longer than originally intended. Alternatively if someone cannot afford the cover for the period they want, they could take out cover for a short period and extend it later with slightly high premiums.
It might be a financial jungle out there, but it's not impossible to navigate your way through to financial security.
Rachel writes for the personal finance blog Cashzilla.
Rachel eats a lot of Green and Black's chocolate, particularly Maya Gold -it's delicious and fair-trade too.
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