Life insurance what is it & how does it work?
Life insurance is the simplest, most popular and cost effective way to financially protect any dependants in the event of your death. While it wont help those left behind to get over their loss, the benefit of a lump sum, in most cases tax-free, will guarantee your family aren't deprived of funds during an already stressful time.

With the cost of life insurance at an all time low, now is the perfect time to arrange cover. For those in good health, a policy that was taken out six years ago can be replaced today for significantly less, despite the fact that being older, one is in theory at greater risk. The industry over-reaction to the threat of AIDS initially caused premiums to rocket skywards, but when the expected epidemic failed to materialise, costs fell rapidly from the mid 1990s onwards.

Life insurance premiums vary from person to person, with factors such as age, gender, current and previous health, lifestyle, term required, occupation and smoker status all having an influence. Risk is assessed with the use of whats known in the industry as mortality tables to determine the premium for a particular individual, to which a 'loading' may be added which takes further account of other factors relating to medical history and lifestyle.

Whole of life versus term life insurance
Life insurance can be split into two main types, known as whole of life insurance and term life insurance. In essence, as the name suggests, whole of life insurance provides cover for the lifetime of the policyholder, whereas term life insurance provides cover for the duration of an agreed period in time. For all policies its crucial to ensure that premium payments are kept up to date to keep cover in place.

Whole of life insurance
Whole of life insurance tends to be the more expensive option, though often has the advantage of being more flexible. It can fulfil many purposes including personal protection, family protection and inheritance tax planning, and can be combined with a term life insurance policy to cover specific debts as required.

Typically, policyholders' contributions are invested and life insurance benefits are 'purchased' using the investment fund. The funds performance, along with other factors, has a significant effect on the level of future benefits. As the policyholders age increases the cost of the insurance increases, thus reducing the sum in the investment pot. The investment element varies from insurer to insurer; some are more generous payers than others, making the expert advice of an insurance broker or independent financial adviser invaluable in choosing such a policy. Some plans require contribution until the policyholders death, some for a set period of time, and some up until a certain age is reached, with additional options available to cover specific illnesses or disability. The common factor throughout is that cover is maintained for the life of the policyholder, making whole of life insurance a very popular way to leave dependants a nest egg.

One great benefit of whole of life insurance is that the guarantee of a payout on the policyholders death, at whatever point in time that may be, removes much of the guesswork involved in other types of life insurance. As long as premiums are maintained, cover is assured. Although the more expensive option, its important to note that premiums are lower than those one would pay in later life by repeatedly renewing term life policies.

Term life insurance
A simpler option, term life insurance offers basic cover for a set number of years, usually at low cost. A term life insurance policy requires a regular premium payment and pays out a lump sum on the policyholder's death providing this occurs within the term of the policy. Death outside of the term to which the policy applies wont result in a payout, meaning the loss of any investment made, making it particularly important to be sure that cover is adequate and the term is appropriate.

Some policies can be extended to provide critical illness cover; full disclosure of all medical conditions, existing and historic, is vital when arranging this to avoid a denial of payment just when its needed most. Its also imperative to be certain exactly which conditions the policy covers, as insurance companies are notoriously specific as to the illnesses theyll pay out for!

Term life insurance cover can be further categorised into these types:

Flat-rate (or level) cover - offers a set amount of cover for the policy term, fixed from the outset.
Decreasing (or mortgage protection insurance) cover - cover decreases over the term of the policy, often inline with a diminishing mortgage debt.
Family income benefit pays out a regular income rather than a lump sum during the policy term.
Increasing term assurance - premiums and benefits increase each year, usually in line with inflation, allowing the protection of a lifestyle.
Convertible term assurance gives the option to convert to a whole of life policy without giving new information about your health.

How much cover do I need?
Its important to correctly identify your dependants financial needs to establish just how much life insurance cover to arrange. A general rule is to choose a policy providing at least ten times your salary, but more may be appropriate, with the amount varying depending on how you intend it to be used. Basically you decide how much you want your dependants to receive in the event of your death, and your premiums will be determined accordingly.

Dont overlook factors like: