“In simple terms life insurance is an insurance policy which pays an amount upon the death of the life assured, typically a lump sum,” says Kevin Carr, chief executive of Protection Review and MD of Kevin Carr Consulting.
“The most common type of cover insures a specific period of time, such as 25 years for example, which may cover a mortgage. Cover can also be taken on a whole-of-life basis, which has no specific term and runs until a claim is made, which is more expensive.”
The term will typically between one year and 50 years, adds Peter Hamilton, head of Zurich UK Life’s protection proposition.
“When considering the term, considerations might include intended retirement date, when children might become financially independent or when a mortgage or loan is paid off.”
But for insurance to be effective, notes Michael Owen, director of Brooks Macdonald Financial Consulting, there has to be an ‘insurable interest’ between the person effecting the policy (the proposer) and the person being covered (the life assured) and a reason for the cover to have been taken out.
“Insurers will generally not allow a policy to start where there is no insurable interest or where the policy will leave the proposer in a better financial position than would be the case without it,” he says.
The downside of life insurance, he suggests, is that someone has to pay to insure that risk and, in the case of term policies, the insurance may not pay out at all if the life assured survives the term.
However, as Mr Carr notes, the cost of cover is relatively low because most people are expected to live until their 80s. “As such life insurance is cheap for a reason – claiming is generally far less likely than being too ill to work.”
Mr Hamilton laments that “most people are happy to ensure their house and its contents, their car, their cat, their travel plans or their mobile phone, but they often give little thought to the income that funds their lifestyle”.
He says: “Death, long term sickness and disability are subjects most of us would rather avoid discussing. Insurance cannot hope to deal with the emotional impacts of such events but it can minimise the financial impact if the worst happens.”
He states that life assurers will generally pay out the full sum assured even if the policy has been running only a matter of months and if the client survives until the end of the term, there is no cash back, “but the good news is they’ve survived until the end of the term and had the peace of mind of having been protected”.
