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Life Insurance: What, Why and How
Life Assurance companies issue life insurance policies. All these policies pay out either a lump sum or a series of payments if you die during the time period covered by the policy. These payments are normally paid without tax being deducted and for most people they are tax-free. The money you receive from a Life Insurance policy can be used for anything you want but most frequently, people have Life Insurance in order to: -
- Provide a lump sum to pay off an outstanding mortgage if the policyholder were to die. This type of policy is generally known as Mortgage Protection Insurance.
- Provide money to pay off other debts if the policyholder were to die.
- Provide a lump sum amount for anyone the policyholder specifies (normally dependents - most frequently the wife and/or children).
- Provide an income, as opposed to a lump sum, for your dependents. This type of policy is known as Family Income Insurance. With this type of policy the income is only payable for the remaining period of the policy's term.
The first consideration while having a life insurance should be the level of insurance cover you require. There are web sites that provide the facility to calculate the level of cover you require. Alternatively you can calculate the figure for yourself. To do this you need to work out how much money would be needed to pay off all your debts and how much income your dependents would require to continue the same lifestyle they currently enjoy. When you do this you will have to take into account the affect of inflation and the investment return you can budget on receiving.
When you are using life insurance to cover the repayment of a mortgage (sometimes known as Mortgage Protection Insurance), the initial sum insured needs to equal the value currently out standing on your mortgage.
Once you have decided on the value of cover you need, the next big decision is to decide how long you wish to be covered by the insurance known as the policy's 'Term'. In case of Mortgage Protection this decision is easy, as the term needs to equal the number of years outstanding on your mortgage. In other circumstances, the term is a personal decision but your age will be an important influence.
The last decision you have to make is whether you want the value of your policy known as the 'sum insured' to be increased automatically in line with inflation. These types of life insurance policies are called "indexed" policies. Most Insurance Companies in UK use the annual increase in the Government's Retail Price Index as the basis for increasing your sum insured. Life insurance policies that provide an increasing sum insured are called 'Increasing Term Insurance' while life insurance policies that provide a constant sum insured are known as 'Level Term Insurance'.