Term life insurance
Life insurance policies pay a lump sum to a person you name (for example, your spouse or dependants) if you die during the term of the policy. Term life insurance is the simplest and one of the cheapest forms of life insurance (compared to whole of life insurance).
For example, you might take out a term life insurance policy on your own life for €100,000 over 10 years. This means if you die within 10 years (the term), the policy pays out €100,000 to your dependants. If you don't die within the term of the policy, no benefit is paid out and the policy ends.
You may need life insurance if:
- Your family or others rely on you for financial or other support – for example, they rely on you for your salary, or the work you do in the home or family business
- You have any loans or debts that your family could not pay if you died. Bear in mind you may already have mortgage protection insurance for your mortgage
- You act as a guarantor on a mortgage for someone
If you have a young family, you will need more life cover than if your children are older, because the benefit will have to last longer. You need to consider buying enough insurance to:
- Give your family an income for as long as they need it
- Pay off your loans or mortgage (you may already have mortgage protection insurance for your mortgage)
- Cover bigger costs that might arise in the future, such as college expenses for your children
You may not need life insurance, or you may need less cover if:
- No-one depends on your income or work
- You have death-in-service benefits through your job or pension plan
- You have enough money for your dependants to live on if you died
- Your dependants could live comfortably on any social welfare benefits they would get if you died
- You have investments or property that could provide an income or be sold
- Your family is grown up and financially independent
- Your partner is earning enough money to support themselves (and any dependants)
If you are in a relationship and have dependant children, you might want to consider a joint life policy. This covers two people on the same policy and could pay out a lump-sum if either of you die (a joint life policy) or if both of you die (a dual life policy). A joint life policy ends when the first person dies. A dual life policy continues until the second person dies.
If you arrange a policy on your own life, the benefit is paid directly to your estate, or to whoever you have named as the beneficiary, once the insurer has received proof of your death. If your spouse or partner takes out a policy on your life, the benefit could be paid to them without going to your estate. If you have a joint life policy, the benefit is usually paid to the surviving policyholder named on the policy. Get information on making a claim.
Before you take out life insurance
You must decide:
- The amount of cover you want paid out on your death, known as the 'sum assured' or 'policy benefit'
- How long you want cover for, known as the 'term'. If you have a young family, you may want to put life insurance in place until your youngest child has left school or college. This could mean having a policy with a 20 or 25 year term. You could also get insurance for a five or 10 year term, if your family is older. If you want cover that will pay out no matter when you die, you will need whole of life insurance. The amount of cover and the term are both fixed for the life of the policy, as is the premium, or the amount you pay for the policy, unless you buy index-linked insurance.
- The type of cover you want. The standard premium usually covers terminal illness as well as death, but check with your provider. This means that the policy will pay out a proportion, usually around 80%, of the policy benefit if you are diagnosed with a terminal illness (this is not the same as serious illness or critical illness cover). The remaining benefit is then paid out when you die. An advantage of this is that getting most of the benefit in advance could help pay for any medical costs you have.
You will have to fill in an application form, called a ‘proposal’. This asks you for details such as your medical history, your lifestyle (your job, hobbies, drinking and smoking habits), the name of your doctor, your family’s medical history and other details. The insurance company may contact your doctor to get a report about your health, depending on your age and the type and value of the policy you want to take out.
Complete your proposal form fully and truthfully. If you don't disclose the full facts known to you at the time, your policy may not be valid and your dependants may be unable to claim against it.
Insurance companies will not usually ask you to have a medical examination unless you have a history of illness, you are over a certain age, or you are applying for a large amount of cover on a life insurance policy.
Generally, term policies will not pay out if your death is caused by a medical condition that you were aware of when you first applied for cover but you did not disclose or your death is caused by suicide within the first year or two of the policy.
The amount of your premium usually depends on the amount and term of your insurance and the type of policy you want.
Factors that could affect the price include:
- Age - premiums are higher the older you are when taking out a policy, as the risk of death increases with age
- Smoking - premiums for smokers can be as much as double the cost for non-smokers due to an increased risk of smokers dying younger
- Current and past health - if you have a medical condition or have a family history of certain illnesses or early death, you usually pay a higher premium
- Work and lifestyle - your premium may be increased if your work or lifestyle interests are likely to put you at greater risk of dying early or suddenly
Most people who apply for insurance are accepted at normal policy rates. However, sometimes an insurer will charge a higher premium than normal, called a ‘premium loading'. This could be because they feel there is a higher risk of you making a claim, for example, for medical reasons. Occasionally an insurer may postpone giving you insurance until they know the outcome of a medical procedure you are about to have. In a small number of cases, an insurer may refuse to insure you because they consider the risk of you making a claim is too high.
You may be able to add extra benefits to a basic term policy for an extra cost. These benefits could include:
- Serious illness cover. If you add this cover to your life policy, it means you could make a claim during the term of the policy if you were diagnosed with one of the serious illness covered. The illnesses typically covered are usually very serious, such as cancer, a heart attack or stroke. Read more about adding serious illness cover to your life insurance.
- ‘Index-linking' - this means the amount you are covered for increases in line with inflation each year. Typically, your cover rises by between 3% and 5% to keep up with inflation. Inflation would, over time, reduce the value of any money paid to your dependants so your premium goes up each year to pay for it. Many policies are index-linked automatically, so If you do not want your policy to be indexed, tell the insurance company when you are taking out the policy.
- A conversion option - this option lets you convert your policy into a new policy before the end of the term without having to prove that you are then in good health. The premium for the new policy will be based on your age when you convert the policy. Usually, you have to be under 60 or 65 to convert your policy. It means you will be able to continue your life cover when you are older, in return for paying a slightly higher premium now.
There may be other policy benefits available in addition to those listed above. Always read the policy terms and conditions and ask how much extra you will pay for extra benefits.
If you stop paying premiums, your policy will automatically lapse after 30 days. Once a policy has lapsed, you are no longer covered. Some companies will let you re-start the policy if it has lapsed for only a short time if you are prepared to pay all the premiums you have missed and you sign a declaration saying you are in good health. However, if your policy has lapsed for more than a few months, you may have to take out a new policy. As you would be older than when you first applied, the premium may be higher and you may need to provide new evidence of your state of health. If your health has deteriorated, you may not be able to get a new policy.
Life insurance benefit is paid out as a tax-free lump sum. However, anyone who inherits the money after your death, depending on their relationship to you, may have to pay inheritance tax. How much tax they pay depends on how much they inherit and Revenue rules at the time of your death. You can buy a specific type of life insurance policy, to provide a tax-free lump sum to cover any inheritance tax liabilities that your beneficiaries may have when you die.
You can cancel your life insurance within 30 days of the policy being issued and get a full refund of any premiums you have already paid. This is called a 'cooling off' period. You can cancel a policy at any time in writing, but you would not be entitled to a refund of the premiums paid once the cooling off period is over.