In the past, common triggers for considering life insurance were major life events, such as having a baby, purchasing our first home, losing a loved one or getting married.
However, over the last two years because of the devastating effect of the global COVID-19 pandemic more and more people are considering life cover for the first time.
The US now has the highest number of COVID-related deaths, reaching 932,443 in February 2022. In the UK the death toll has now reached 158,677 and in Australia 4,373.
Looking at these shocking figures, it is easy to see why millions of people worldwide are being prompted to take out financial cover to protect their loved ones.
But why might we need life insurance?
- To cover the mortgage and protect the family home
- To meet future family living costs (food, drink, leisure, clothing, fuel, mobile, schooling)
- To cover household bills (electricity, gas, water, broadband, council tax, maintenance)
- To cover childcare expenses in the absence of a parent
- To leave an inheritance
- To clear outstanding debt
- To cover rising funeral costs
Many people put off taking out life insurance for another day, however typically we only need financial protection when an unforeseen situation is forced upon us.
A common reason people hesitate to take out life insurance is because they find the terminology and the process confusing.
As a result, in this article, we seek to unpick the life insurance jargon, to help you make a fully informed decision in an increasingly uncertain world.
Here are the common terms you may not be familiar with;
The sum assured
The sum assured is a term used to describe the policy cover amount or put another way the pay out sum.
Generally speaking, the higher the sum assured, the greater the cost of your cover because the financial risk to the insurer is increased. Therefore, it makes sense to carefully calculate the sum assured you require, consider your mortgage debt, future family living costs and the age of your children/dependants.
For our British audience, broker Reassured has written this comprehensive article on the average cost of life insurance in the UK.
The life insurance premium is simply the fee you are charged by the insurer to receive the financial cover. Usually, you will be charged a premium on a monthly basis.
Life insurance can be divided into two types, term-based or permanent (whole of life) cover.
The term is the length of time that the life insurance policy provides cover for. For example, you may take out a level term life insurance policy with a 30-year term, to cover you and your loved ones until the mortgage is paid off and the children are financially independent.
Because term-based cover has a specified end date it is possible to outlive your policy and therefore pay into a policy that does not pay out.
In contrast a whole of life or universal (permanent) policy guarantees a pay out when and not if you pass away. As a result, term-based cover is cheaper as the insurer is not guaranteed to pay out.
The cost of your premium is calculated by the insurer based on the level of risk you pose or put another way the likelihood of a pay out. The greater the likelihood, the higher the monthly premium.
As a result, it can be tempting to withhold certain information or even lie during the application process in order to secure a cheaper premium. This is known as non-disclosure.
If it transpires that you were not 100% honest during the application, it could jeopardise a future pay out. It is always vital to be completely open and honest during the application process to ensure your selfless investment is not wasted.
The terms life assurance and life insurance are often used to mean the same thing, but there is a key difference, which we touch on above.
In simple terms, life insurance pays out if you pass away during the policy term. Whereas life assurance pays out when you pass away.
As a result, term-based cover would be an example of life insurance and whole of life insurance a form of life assurance (as a pay out is assured). In the US life assurance if often referred to as permanent life insurance.
Critical illness cover
Critical illness cover can provide a tax-free, lump sum pay out if you are diagnosed with a life-changing condition covered within your policy.
It can be added as either an additional element to a life insurance policy (for an extra cost) or as a standalone product.
Impaired life insurance
In the life insurance sector, a non-standard applicant can be described as impaired. Often someone who has had or has a pre-existing medical condition is referred to as an impaired applicant.
Whilst this means you will probably be charged more, it does not categorically mean that you cannot secure cover, just that you will not be able to secure standard rates.
We hope this article has helped educate you on some of the key terms which are often misunderstood.
The past two years have been extremely challenging, both from an emotional and economic standpoint and whilst a life insurance pay out can never replace a loved one, at least it can lessen the significant financial burden at a stressful time.