Life insurance FAQ

- This is a method of sharing the risk that any event will occur e.g. that you will have an accident as a driver. Life insurance is slightly different because, so far, there's no way of avoiding death.

- The main risk is that your family and dependents may be left in serious financial difficulties if you die earlier than expected. Once children have grown up and the family has paid down its debts, the purpose of insurance changes to retirement funding or wealth transfer on death.

- This is the amount you must pay annually or in other installments to keep the policy active.

- This offers cover against the risk of death for a fixed period of time. Like any other type of insurance, if you pay the installments on time, you have the benefit of the cover for the time. Once the time has passed, the insurance cover lapses.

- This is the general term to describe all the policies that, unlike term, can remain valid until you die. So this includes whole life, universal life, and variable universal life policies.

- All permanent policies have a cash value element. A proportion of your annual premium payments is paid into an investment account. Usually at the end of each year, the insurer adds a dividend to the account so it accumulates over the years. So on death, you get the guaranteed minimum death benefits plus the value of the cash sum which, over the decades, can have built up to a significant amount.

- Can you withdraw money from the policy during your lifetime? If there's a big bill coming or an emergency, there are a two main options. Some policies allow you to "borrow" the money from the account. As with any loan, interest is payable even though it's your own money. You need to be careful and pay this back because the high interest rates can eat into the remaining cash value. The second option is to use the life insurance policy itself as collateral for a loan.

- This is the process of ending the policy during your lifetime. You release the insurer from its obligations and you recover what you paid into the policy less the initial commission and set-up fees, plus all the annual charges. As a general rule, this delivers very bad value.

- If the policy is paid up-to-date and there's a minimum cash value, there's a secondary market through which you can sell. This always delivers better value than surrendering the policy.