The Fundamentals of Life Insurance

Copyright (c) 2007 Katie Brown

It's a good idea to take out life insurance as soon as possible as only those who are reasonably healthy are permitted to buy life insurance. If you are already suffering from some illness or have been diagnosed as terminal ill, it's unlikely that any life insurance company would knowingly issue you with live insurance cover. Ultimately, the insurers hope that they you pay a significant amount of fund in before they pay out and if this is known not to be the case then the insurers will not take you on. However, some insurers do provide "second to die" policies are available as long as one of the two applicants is insurable. A common gripe with life insurance is that you have to pay premiums for a long period of time without seeing any tangible benefit or immediate gratification. In fact, it's not something that you will ever benefit from directly – its and unselfish purchase and possibly a true act of altruism. Get a grip! If this is the case then you have nothing to complain about. Enjoy your years. Once you're gone, it's a fact of life that almost everything that you leave to your loved ones will be subject to inheritance tax. Life insurance is the only asset you can own that will guarantee tax-free cash for your loved ones at the exact time they will most likely need it. Having said this, I strongly advise that you find yourself an IFA who specialises in inheritance tax and formulate a plan to avoid as much inheritance tax as you are allowed to. The few hundred pounds this will cost will be worth it in the long run for your family.

Types of policies:

There are two basic types of policies - term life and whole life (also referred to as permanent). The "term" is defined as that point in time when the death benefit will no longer be paid to the insured's beneficiary. If the insured party has not died prior to that point in time, there is no value.

The whole life death benefit is always available provided the premium has been paid when due.

Competition has forced life insurance companies to develop numerous other types of policies, but they are simply hybrid forms of term and permanent. These include universal life and variable universal life. The numerous and complicated features of these hybrids make many policies very difficult to understand. We recommend getting a good feel for the different polices and price scales available by using an online service such as The Motley Fool that allows you to compare life insurance. The certainty of mortality and the expected time of meeting with this certainty is the basis for life insurance cover. Since the expectation of death increases each year, the cost increases as we age.

Life insurance is primarily state regulated, although this may change in the near future. The scales for pricing life insurance premiums, rather than being at the sole discretion of the insurer are subject to government guidelines.

This means an insurance company must honour certain expectations in their pricing. If a company wishes to use a different mortality table to price their products they may do so as long as the mortality expectation meets state requirements. Life companies consider their own experience with mortality when developing different products. Sometimes they count on having the mortality experience for all of their products to be good enough to over-compensate for one particular product that is intentionally under-priced.

For example, they might introduce a very low cost term life policy with unrealistic mortality expectations compared with the state requirements. This is done with the hope fewer deaths will occur with the under-priced product.

Even if a term premium seems inexpensive upon purchase and priced to stay level for a period of 20 to 30 years, under normal circumstances the price becomes unaffordable at the end of the level premium period.

Keep in mind that most term policyholders don't die before the level period expires; therefore, most term policies lapse without value. Regardless, there value of such a term policy remains uncompromised so long as the terms, condition and scope and clear and adhered to. The only reason to buy a life insurance policy is because you love someone so much that you want to guarantee they will have additional money in case you die prematurely. As ASAD Finance so eloquently put it ; "What would happen to your family if you weren't there or were unable to earn a living? For a very small monthly premium , companies such as ASDA Finance are able to provide you with cover that will at the very lease ensure that that your family has reduced if any financial problems after." see their life insurance section.

Unfortunately, there remain a few unprofessional financial advisors that will lead the uniformed into believe that life insurance can be a valuable addition to ones retirement portfolio... or an education fund... or a forced savings plan... or even an investment.

There are much better ways to address all of those, so don't get conned into buying a life policy for anything other than what it is intended to be and that's a death benefit. Your primary objective in the purchase of a life insurance policy is to secure the lowest net cost death benefit that will be guaranteed regardless of when you actually die. While some products such as Legal & General's life insurance can be very good, you should weigh up the cost-benefit of the extra protection included.

Do yourself a favour and ignore those who advocate the buy term and invest the difference strategy. This is not always a strategy that works and come with a lot of associate risk.

The death benefit paid by a properly structured life insurance policy that has been issued by a financially healthy company will always - always - be better for your loved ones.

Why? Because it is guaranteed to perform at exactly the time when it is needed the most. When you buy a policy you are usually given at least 10 days to review it. If you decide you don't want it, you can return it for a full return of premium.

Take advantage of this notice period to actually read your policy. Don't just put it away and believe everything is okay. If you have questions, make sure the life agent responds appropriately.

Whether you chose a cover such as ASDA's life insurance based on affordability, compare a range of covers using the The Motley Fool's life insurance service, or opt for what is perhaps a more tailored and robust policy such as Legal & General's life insurance which has won a record six awards at the annual LifeSearch awards, a life insurance policy will be a sound investment.

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