10 things to consider when taking out life insurance
Taking out life insurance can provide you with peace of mind knowing that your loved ones will be looked after financially should the worst happen. If you’re thinking about taking out life cover, here are ten key factors to consider.
However at bonkers.ie we know that choosing the right life insurance cover for you can be both time-consuming and confusing, so we’ve tried to make it easier!
In this guide, we’ve outlined 10 key things to consider when taking out life insurance. This guide is the fifth guide in our six-part life insurance series.
You can view all guides in our series at the end of this article.
Before we jump in, let’s have a quick refresher on what life insurance is.
What is life insurance?
Life insurance pays out a tax-free lump sum if you die during the term of the policy. Not everyone will need life insurance cover, and it really does depend on your personal circumstances.
You may need cover if you have a family who relies on you for financial support, or if you have no life insurance benefits through your job or pension plan.
For more information take a look at our guide on what life insurance is.
Now, let’s take a look at the key factors to consider when taking out life insurance.
1. Whether you want term life insurance or whole life cover
First of all, it’s important to consider whether you want term life insurance or whole-of-life insurance and know the difference between the two.
Term life insurance
Term life insurance is the simplest and cheapest form of life cover and is taken out for a set period of time that has been agreed upon between you and your insurer, e.g. 10, 20 or 30 years. Many parents take out this type of cover to ensure their family is protected until their children reach at least 18 years old.
With a term life insurance policy, a lump sum is only paid if you pass away during the stated term of the policy.
Whole-of-life insurance can last for the duration of a person’s life. This ensures that the policy beneficiaries receive a lump sum whenever the insured party passes away. Whole-of-life insurance is more expensive than basic term life insurance.
With whole-of-life insurance, you select the sum to be insured for a fixed monthly or annual premium. Provided you keep up with payments, you’ll be insured for life.
This type of insurance is most commonly associated with inheritance planning. Due to inheritance tax, inheriting large estates can be a costly expense so some people take out insurance polices to provide a tax-free lump sum to help pay the tax when they die.
Before deciding on your life insurance policy consider why you’re taking out a policy as this will help you decide whether you should opt for term insurance or whole-of-life. If you’re unsure, it’s recommended that you speak with a qualified financial advisor or insurance broker, such as bonkers.ie, to help to put your mind at ease.
2. The age of your youngest dependant
If you decide to opt for term life insurance and are unsure how long to take it out for, consider the age of your youngest dependant.
Typically a life insurance term should be based on the age of your youngest child to bring them to 18. However if possible, it’s recommended you take out a policy that will cover you until your child turns 25, which is the age that they would be viewed as being financially dependent.
For example, if your youngest child is now two years old, ideally you would want to take out a policy with a term of 23 years.
If your family is older, you may only need a policy with a term of 10 or 15 years.
3. How much income would be lost upon death?
Life insurance is primarily taken out to help replace the loss of income in the event of the death of a breadwinner in the family, so it’s vital to consider how much salary the home may lose if the worst should happen.
It’s recommended that you take out cover for around five times your annual gross income. So, for example, if you earn €50,000 then the sum insured would be €250,000.
4. The type of cover you want
Another important consideration is to figure out whether you want single, joint or dual cover. Let’s take a look at each to determine the difference.
Single cover: this insurance covers one person and is paid out if that person passes away during the policy term.
Joint cover: this policy covers two lives, however there is only one payment made. Usually insurance companies will pay a lump sum when the first of the two people covered dies during the policy term. The policy then ends when the first person dies.
Dual cover: this cover also insures two people under the same policy but a claim can be paid out on both deaths. If one person dies during the term, then a claim is paid out and the policy continues in the name of the survivor. If the second person then also dies, a second claim is paid out. Dual life cover can be more expensive than joint cover, however in some cases it can be the same price.
5. Whether to add extras like serious illness cover
A common added extra to a life insurance policy is serious illness cover, also known as specified illness cover.
Serious illness cover pays out a tax-free lump sum if you are diagnosed with a serious illness covered by your policy.
If you choose to add serious illness cover you can select either standalone or accelerated cover. The former, standalone serious illness cover, means that your life cover and specified illness cover are completely separate from one another. This is more expensive than accelerated cover.
Where serious illness cover is added to a life policy on an accelerated basis, the payment of a claim under the serious illness cover will result in the balance of the life cover remaining on the policy being reduced.
6. Convertible term insurance
Convertible term cover, also known as a conversion option, allows you to extend the term of your cover at any point over the course of your policy should you require a higher amount due to a change in your life circumstances.
Choosing convertible term cover makes it possible for you to adjust your term length without having to undergo a medical examination. It bypasses the underwriting requirement regardless of whether or not your health has deteriorated.
The cost of convertible term insurance will depend on the level of cover required, your age and life expectancy at the time of the conversion.
Including a conversion option in your policy may be a good idea if you plan on making significant life changes in the future, such as having children or getting married.
7. Indexation option
Indexation is another optional extra that allows the benefits of your life insurance policy to increase by a certain percentage every year to keep up with inflation.
The sum insured will increase to cover inflation and this helps to protect the real value of your cover as time passes.
If you opt for indexation, your insurer will write to you directly every year to ask if you would like to keep the indexation option active or not.
8. Smokers will pay more
Whether or not you smoke will have a significant impact on the price you pay for your life insurance policy. Due to the increased risk of dying younger, smokers usually end up paying considerably more than non-smokers for the same cover.
It should be noted that those who use e-cigarettes and nicotine replacement products, such as patches or chewing gum, are also categorised as being smokers.
So, for example a non-smoker in their mid-30s who takes out standard cover for €300,000 over 30 years could expect to pay between €22-28 per month, while a smoker of the same age would likely end up paying €42-50 per month for the same cover.
To avail of the lower non-smoker rates, you have to be completely tobacco-free and not have used any nicotine replacement products for a period of 12 months or more.
It should be noted that if you decide to add any extras to your policy such as specified illness cover or indexation, smoking habits will also have an impact on the price.
9. Terminal illness benefit
Many standard premiums also have an added terminal illness benefit. If you’re unsure whether the policy you’re looking at has this, it’s worthwhile checking with the insurance provider as this type of cover can help pay for medical costs you may have.
If you’re diagnosed with a terminal illness and have less than 12 months to live, your insurance company will either pay out the full amount of life cover as of the date of diagnosis, or they will pay around 80%, with the remaining benefit being paid out after death.
A terminal illness is classified as being an illness where, in the opinion of your consultant and your insurer's chief medical officer, you won't survive the next 12 months.
This is different to serious illness cover, which can be added to most life insurance policies for an additional cost, as mentioned previously.
10. Be aware of when claims can be declined
It’s essential to be as honest as possible when applying for life insurance initially, as claims can be declined for withholding information. Any pre-existing medical conditions not disclosed during your application could affect the validity of any future claims.
For example, if your death is caused by a medical condition that you were aware of but didn’t disclose when you first applied for cover, insurers can refuse to payout. Similarly, if you fail to disclose that you’re a smoker and die as a result of lung cancer, your claim will not be paid out.
If you take your own life during the first year or two of the policy, insurers also have the right to refuse to pay out the claim.
Compare life insurance on bonkers.ie
Do you now feel like you’re ready to take out a life insurance policy? You can do so right here on bonkers.ie!
With our comparison service, you’ll also have the option to include the additional extras discussed above, such as a convertible option, indexation and serious illness cover.
You could find the right policy for you and be covered in under one hour!
Don’t forget to review other everyday household bills too and compare available deals for services such as energy, broadband and banking products to see how much you could save by switching to another provider.
Take a look at our other insurance guides
If you found this guide helpful, make sure you check out the other life insurance guides in our series. You may be interested in the following:
- The first guide in our series outlines what each article covers.
- Learn how to compare and apply for life insurance on bonkers.ie.
- Get to grips with the 8 most common life insurance terms you will encounter when selecting your policy.
- Discover the most common and frequently asked questions by consumers when taking out a life insurance policy.
- This guide explains what the life insurance cooling-off period is and how to cancel your policy here.
Have any questions?
If you have any questions about any of the points discussed in this guide, or about life insurance in general feel free to get in touch with us.