Life Insurance Guidance
The idea behind life insurance is fairly straightforward – if you pass away, your dependents will receive a pay-out to help them out financially when they are at their most vulnerable.
The importance of life insurance is equally straightforward – losing any responsible member of a family, whether or not they are the main earner in the household, brings with it various difficulties including new financial burdens. These burdens can be lessened by a life insurance pay-out, whether this comes in the form of a lump sum or a regular income.
But there are still questions to answer and complications to iron out including but not limited to working out the length of your cover and the size of your pay-out.
In this guide:
Reasons for Taking out Life Insurance
Often, people take out life insurance policies in order to help their families keep up with mortgage or other household debt payments if they should unfortunately pass away and in doing so remove part of the household income.
Different types of policy are available, as well as various added extras designed specifically for this purpose but in general the idea is that if you die while you still have outstanding mortgage repayments, then a sum of money is paid out to your remaining family members by the insurer, helping them to pay off the remaining debt.
However it is not just the payment of mortgages or other debts that a family may struggle with after your death. If you are the main earner then you are likely to be responsible for a large proportion of the day-to-day household expenses, and a life insurance policy will help your family stay afloat during the most difficult of times by providing them with the extra income that they need.
Even if you are not the main earner and are, say, responsible for the bulk of the childcare, then your death too will place a financial burden, beyond the obvious emotional trauma, on your family that a life insurance policy can help to soften.
Types of Cover
There are, broadly speaking, two different types of life insurance cover available: term insurance and whole of life cover.
Term insurance can be split again into two types of policy: level term life insurance and decreasing term life insurance.
With a level term policy, you set both a period (or policy term) and a pay-out value when you purchase the insurance. If you die within this set period, then the set pay-out value is sent to your remaining family members as a tax-free lump sum or, sometimes, in regular monthly instalments.
Decreasing term life insurance works in much the same way but is geared specifically towards the repayment of debts with values that go down over time. So it may be that early on during the policy term, when you have £90,000 left to pay off on your mortgage, that will be the amount paid out, but if you die during the final year, your family will receive only the £5,000 (say) that remains to be paid off.
Decreasing term policies tend to be cheaper than level term policies for obvious reasons.
With both of these policy types, your premiums will remain the same throughout the course of the policy term. If you live beyond the length of the policy, you will no longer be protected and if you still want cover you’ll need to take out a new policy which, due to you increased age, will be more expensive than the first one.
Whole of life policies, on the other hand, guarantee your dependents a pay-out in the event of your death at any time. This assured pay out leads to the alternative name for these kinds of policies – life assurance.
Whole of life cover is more expensive (all other things being equal) than term insurance, and often comes with premiums that are reviewable and subject to change during the course of the policy based on factors ranging from changes in your health to changes in the insurance market and inflation.
Costs of Life Insurance
The cost of the premiums associated with your life insurance policy will be affected by various things from the length of the term you decide to your health at the time.
As with any kind of insurance, the higher the probability of a pay-out, the more expensive the policy will be.
The probability of a pay-out being made, i.e. the probability of your death, is increased by things like:
Your age (older people will pay more for their cover, as general rule)
Your health (including any serious illnesses you have or have had in the past)
Your family medical history (especially the presence of any often inherited medical conditions like asthma)
Your lifestyle (including whether or not you smoke, how much you drink, and whether your job or past times involve any potentially dangerous activities)
You should always read your policy small print to see what things will increase the price and what things will actually exclude you from cover altogether.
Full disclosure of any health issues is crucial during the application process if you want to avoid your policy being invalidated so you should never be tempted to withhold any information because you think you might be able to get cheaper premiums if you do.
Writing Life Insurance in Trust
At no extra cost, you can set up your life insurance policy in such a way that when it pays out in the event of your death it goes into a trust, looked after by a trustee until such time as the intended beneficiary (usually a child) reaches a certain age. This is called writing life insurance in trust.
This has the added bonus of potentially speeding up the pay-out process by avoiding the need for probate to be granted and, as the money never forms part of your legal estate, also allows you to bypass having to pay any inheritance tax on it.
Given that inheritance tax is payable at 40% on any assets beyond the threshold of £325,000, this can mean dramatic savings for your loved ones.
Income Protection Insurance
Income protection insurance (IPI) is available either as an add-on to your existing policy or as a standalone product and will protect you if you become ill or injured to the extent that you can no longer work.
The policy will pay out a regular income, usually around 50-70% of your standard income, until such time as the policy term comes to an end, you return to work or you reach retirement age.
Other similar products include payment protection insurance (PPI) designed to pay off particular debts under similar circumstances as mentioned above, and the more specific mortgage payment protection insurance (MPPI), designed to help pay off your mortgage in the same way.
Something else you can add on to your life insurance policy that will pay out in similar circumstances is waiver of premium cover. This will pay out enough to keep paying your life insurance premiums should you become unable to earn a living due to illness or injury.
Other Optional Extras
Other things you can add to your policy (or even purchase on their own) include critical and terminal illness cover.
Critical illness cover will pay out if you contract any illness or condition from a list set out by the insurer, such as certain forms of cancer or a severe heart attack.
Terminal illness cover works in much the same way.
Changing Your Life Insurance Policy
If your situation changes during the course of your policy, you might want to consider changing the terms of your cover – something almost all insurers will allow you to do, but bear in mind that the change in cover will generally be reflected by a change in the cost of your premiums.
There are a variety of reasons for which you might want to change the terms of your policy. Perhaps you’ve had a new child, and wish to increase the size or change the nature of your pay-out. Or maybe you’ve come into a significant amount of money and managed to pay your mortgage off early, so no longer need the level of cover you have.
Whatever your reasons, if you suddenly find your current policy inappropriate for you situation, you should contact your insurer and see what options are available.
Compare Life Insurance Quotes Online
Whether you want to cancel you current policy and open up a new one, or want to purchase life insurance for the first time, you should always make sure you’re shopping around online to get the best deals possible.
By using our life insurance comparison service, you’ll have your pick of the best quotes on the market, allowing you to get the cover you need at a price that you want.