How Life Insurance Works:
- Editorial Staff
- Apr 30
- 5 min read
For many of us, life insurance can seem like a confusing topic or even a daunting one. But the truth is that getting a policy in place could be one of the most important things you do for your loved ones. Life insurance is a financial asset that provides peace of mind and financial security for your loved ones when you’re no longer around. Whether you're starting a family, purchasing a home, or planning for the future, understanding how life insurance works is important. That’s why we’re collaborating with Smart Insurance to cover the key aspects of life insurance, from how it functions to choosing the right cover for your needs.
How Does Life Insurance Work?
Life insurance is a contract between you (the policyholder) and an insurance company. You agree to pay regular premiums, and in return, the insurer promises to pay a lump sum (your chosen benefit amount) to your beneficiaries upon your passing. This payout can help cover funeral expenses, outstanding debts, and ongoing living costs for your family.
There are two primary types of life insurance:
Term Life Insurance – provides coverage for a specified time period (e.g., 10, 20, or 30 years). If you pass away during this term, your beneficiaries can make a claim to receive the benefit amount you chose.
Whole of Life Insurance – offers lifetime coverage and guarantees a payout to your loved ones when you die, as long as you keep up with your premiums.
What Type of Cover Should You Get? Level vs. Increasing
When selecting life insurance, you’ll also need to decide between level and increasing (also known as age-based) cover:
Level-based
This is where your premium and coverage amount both stay the same for the duration of the policy. This way you know exactly where you stand and what you’ll be paying as the years go by. At Smart Insurance, this type of cover is offered on a term basis.
Age-based or Increasing life insurance
With this type of life insurance, your premiums will increase year-on-year, but so will your cover amount. The idea here is that the amount paid out to your family will have kept up with inflation and the rising costs of living. As costs rise each year, your cover amount may not go as far when the time comes, unless you have chosen an increasing benefit.
At Smart Insurance, an age-based policy will start you off with lower premiums than a level policy, but they’ll increase every year based on both your age. Your benefit amount will also increase by 5% every year for the first 10 years of your policy, which helps to pad out the sum your loved ones will receive.
Your choice depends on your financial goals and how you want to protect your beneficiaries from inflation’s impact over time.
What Are the Benefits of Life Insurance?
There are many ways that life insurance could help to protect your family’s financial future. For example:
Financial protection for loved ones – ensuring your family has some financial support in the event of your death
Debt repayment – life insurance can cover outstanding loans such as a mortgage, personal loans, or credit card debt
Income replacement – life insurance could help to maintain your family’s standard of living, especially if you are the main breadwinner
Childcare – if you’re the main caregiver for your children, life insurance could help to cover childcare expenses if you were to pass away
A nest egg – nobody knows what the future holds, but with your benefit amount your loved ones could put aside some extra savings for a rainy day
Do You Need Life Insurance?
Life insurance is not a one-size-fits-all solution, but it is beneficial for many people, especially if you:
Have dependents (a spouse, children, or aging parents) who rely on your income
Have outstanding debts that could become a financial burden to your family
Want to cover the loss of your income or the cost of childcare, so that family life can go on as it should
If you’re single with no dependents and minimal financial obligations, you may not need life insurance. However, it’s worth considering if these kinds of responsibilities might be in your future. Remember, life insurance will be more expensive the later you take it out.
What Is a Good Time to Take Out Life Insurance?
The best time to get life insurance is as early as possible. The younger and healthier you are, the lower your premiums will be. If you wait until later in life, you may face higher costs , especially if you have pre-existing medical conditions. Key life events that often prompt people to take out life insurance include:
Getting married – you can ensure that your partner will be taken care of if the worst should happen.
Having children – in the same way as above, if you have kids, you can provide for their future to make it as bright as possible. Life insurance can help pay for childcare costs, or even future education.
Buying a home – life insurance can provide the security of knowing your family could continue to remain in their home if you’re no longer around.
Starting a business – you can secure the future of your business by having a life insurance policy to cover costs after you pass. If your family depends on the business, this can be a very good reason to take out a policy.
How Much Cover Should You Get?
The amount of coverage you need depends on your financial obligations and long-term goals. You could start by considering the following factors:
Outstanding debts (mortgage, loans, credit cards)
Monthly living expenses for your dependents
Education costs for children
Funeral expenses
Future financial plans for your family
It could also be a good idea to consider what assets you already have. If you have savings or investments, these can contribute to your family’s financial security. Do you have a pension that could cover some of the above reasons for getting life insurance? Also, do you have any other life insurance policies that might reduce the amount of cover you need? You may have a life insurance policy through your employment, also known as death-in-service, so consider how much that is worth.
A common rule of thumb is to have coverage that is 10 to 15 times your annual income. However, everyone’s situation is unique, so it’s best to assess your specific needs before deciding.
How Much Does Life Insurance Cost?
The cost of a life insurance policy depends entirely on an individual’s personal circumstances. It varies based on several factors, including:
Age: Due to having less risk, younger applicants usually pay lower premiums.
Health: While it’s not impossible to secure life insurance with a pre-existing condition, they can increase costs.
Cover amount: The higher your chosen coverage amount, the higher your premiums will be. That’s why it’s so important to carefully consider how much coverage you really need.
Policy type: Term policies are typically more affordable than whole-life policies due to the fact that they will expire and may not require a payout.
Lifestyle factors: Smoking and high-risk activities can lead to higher premiums.
Final Thoughts
Life insurance is all about making a fully informed decision on what’s best for your family’s future. By finding out how much cover you need, and selecting the right plan, you can sit back with the comfort of knowing that your family is well protected. Talk to one of the expert advisors at Smart Insurance today.
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