How does Life Insurance work?

Life insurance actuaries look an individuals age, sex, health and habits and decide when someone with that profile is most likely to die. They then consider how much cover the buyer wants to purchase and set the premiums accordingly.

For example, smokers are (on average) likely to die sooner than non-smokers. Insurance companies know this means they will probably have to pay out a little sooner whenever they insure a smoker, and therefore charge people who smoke a higher premium to reflect this. This principle forms the basis of all life insurance.

There are two main types of plan to choose from:

• Term Life Insurance
  This is the cheapest option, and pays out only if the holder dies while the policy's fixed-length term is in force. If the holder survives until the end of the term, they get nothing back. People often time their insurance to run only until a big family commitment ‚ such as the children's education, had been cleared.
  

• Whole of Life Insurance
  As the name suggests, these policies remain in force right through the buyers life. It follows that the insurance company will have to pay out in almost every case, and premiums are therefore higher than those charged on term life insurance plans. Some policies demand that premiums be paid all the way up to the holders death. Others become paid-up at a certain age, and waive premiums from that point onwards.
  

What Does The Cover Provide?

There are a number of different types of Term and Whole of Life Insurance plans on the market. The cover which is provided will depend on the type of plan taken out. The types of plans available are as follows:


Term Life Insurance

• Level Term
  The plans potential pay out remains the same for the full term of the policy.
  
  
• Decreasing Term
  The level of cover gradually reduces over the policy term to match a reducing liability such as the amount left to repay on a mortgage loan.
  
  
• Increasing Term
  Cover offered and premiums paid gradually increase in line with inflation. Designed to ensure the amount of cover purchased remains realistic and is not eroded by the effects of inflation over time.
  
  
• Renewable Term
  Allows plan holders to extend their cover for a further term with no health check.
  
  
• Convertible Term
  Allows holders to swap their term cover for a whole of life or endowment policy with no health check.
  
  
• Family Income Benefit
  Pays the surviving family a regular income instead of a lump sum for the remaining term of the policy.
  

Whole of Life Insurance

The majority of whole of life insurance policies are unit linked which means that premiums are invested into a fund and the cost of the protection is deducted from the fund as it grows. When a plan is taken out there is a choice of 'Maximum' or 'Standard' basis.

Maximum basis gives a very high level of cover for the monthly premium. Whilst this level of cover will be guaranteed for 10 years it is very likely that there will have to be an increase in premiums after each of the regular reviews. These usually take place after 10 years then after every 5 years.

Standard basis gives a lower level of cover for the premium, but is more likely that this level of cover and premium will stay the same throughout the policyholders life.