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Understanding the basics of life insurance

Do you find it daunting when buying term assurance, ever received term insurance quotes and not known what to look for, here is an article to give you a good foundation when buying life insurance

Author: James P White
Date: Jan 31, 2010 - 4:41:03 PM

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There is a variety of life cover available but for now we will concentrate on term assurance as it is the most common.

We are all well aware we need financial protection especially when a spouse and children are involve. Term assurance financially protects your life for a set time period. It is used for many purposes, perhaps to cover a specific loan, a mortgage or to your cover the everyday expenses of your loved ones.

You must intitially decide the purpose of the cover, what will it be used for, a specific debt or simply help your loved ones with everyday expenses should the worst happen. Knowing the purpose of the cover you can determine the sum you need to insure and the duration of the cover. Take covering an outstanding debt such as a mortgage, simply align the cover with the outstanding mortgage and the length of term. The greater the level of cover and the length of cover the more expensive the policy.

The main personal factors which will affect your life insurance rates are your age and whether you are a smoker, a smoker is generally considered any person who has used tobacco products in the past 12 months. Like with any insurance the higher the risk of a claim the more you are likely to pay, thus you can imagine with age your premiums increase due to the increasing risk of dying while smokers have inflated premiums due to the health risks associated with smoking.

When buying term insurance you will go through underwriting, a process whereby you declare your quality of health and the insurer assigns a risk factor. If you have any serious existing conditions the insurance provider may well load the premiums to cover the risk or decline to quote completely.

Having covered the key personal factors there are a number of factors in the design of the cover which can affect the premiums. Adding additional options and flexibility to your plan will always increase the cost, the main options available determine whether your premiums are fixed or reviewable, whether you want your cover to increase in line with inflation, whether you want to cover your premiums should you become ill and unable to work and the option of including critical illness cover.

Waiver of premium ensures your monthly premiums are met should you become seriously ill or injured and are unable to work, this can be very important financial protection given other financial obligations will still need to be met if you are not working.

Indexation is another choice which can prove very useful, indexation ensures the sum insured is not eroded over time by inflation, this means £150,000 of cover today will still be worth the equivalent of £150,000 in say 30 years.

Guaranteed or reviewable premiums is a choice we all have to make when buying a term policy. Guaranteed premiums does exactly what is says on the tim, your rates are guaranteed, fixed throughout the life of the policy, premiums of £25 today are still going to cost £25 in 20 years time. Reviewable premiums leave a level of additional risk attached to your policy. Reviewable premiums give the insurer the right to review the risk associated with your life cover every 2-5 years and thus the ability to change the premiums. It is the general consensus that reviewable premiums tend be cheaper in the short run but over a longer term often end up being more expensive than guaranteed premiums.

One of the biggest considerations for term cover is whether to include a critical illness policy. A life policy as a standalone product will only cover you on death, by including critical illness insurance you are also protecting yourself against critical illness such as a heart attack, cancer or stroke. This is not a decision to be taken lightly, given the additional risk the insurer is bearing covering critical illnesses as well will see the premiums increase substantially.

Unfortunately here we are only scratching the service, hopefully you will at least find this useful enough to get a grasp of the bascis and the effects the term insurance options will have on your premiums.

Article produced by James P White of Drewberry Personal Life Insurance Brokers, specialist term assurance brokers providing information, advice and term insurance quotes to help you find the right policy at the right price.

View all articles by James P White

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