How does Life Insurance work?
If you take a policy out on your own life, the amount of the policy is paid directly to your estate, or to the named beneficiary. If your spouse or partner takes out a policy on your life, the benefit could be paid to them without going to your estate. If you have a joint life policy, the benefit is usually paid to the surviving policyholder named on the policy. The amount is paid as tax-free lump sum, but anyone who inherits the money after your death may be liable to inheritance tax, depending on their relationship to you. However, you can buy life insurance policies that provide a tax-free lump sum to cover any inheritance tax liabilities that your beneficiaries may have when you die.
A standard premium usually covers terminal illness as well as death, but you should check with your provider. In this instance, the policy will pay out a proportion of the policy benefit if you are diagnosed with a terminal illness. The remainder is paid out upon your death. An advantage of this is that getting most of the benefit in advance could help pay for any medical costs you have.
There are a host of other extras you can opt for when taking out LIP, so it is best to discuss your
options at length with your provider.
The amount of your policy will depend on the state of your health and your age. Insurers require you to answer detailed questions about your general health and lifestyle. Dishonesty is quite serious in this case, as any incorrect facts may potentially invalidate the policy. If you smoke, declare it; if you quit, declare that, too.
The amount of your premium varies, depending on what you want to get out of it in terms of length and benefit. However, premiums are always highest for people with the following risk factors:
- 1. Age – the older you are, the more you will have to pay as the chances of death increase with age.
- 2. Smoking – it is not unusual for smokers to pay double the premiums of non-smokers due to serious health risks brought on by smoking
- 3. Your general health (current and past) – if you have a medical condition or have a family history of certain illnesses or early death, your premium will be higher than average
- 4. Work and lifestyle – your premium may be increased if your work or lifestyle put you at greater risk of dying early or suddenly
Not everyone needs life insurance. For instance, there may be no benefit in taking it out if:
- 1. You have no dependants
- 2. You have death-in-service cover from your employer or through your pension plan
- 3. You have enough money for dependants to thrive without it