A guide to everything you need to know about life insurance
As with all forms of cover that place a hole in your finances, acquiring life insurance is not a necessity and is typically the most beneficial to people who have dependents that financially rely on them as their primary source of income.
If you are currently single, or do not have any children, then it should be noted that it is not worth you acquiring life insurance at this stage, because you do not have any people that you leave behind who are reliant on your financial support.
As it sounds, life insurance is a form of cover that ensures peopleís families receive financial funding in the event that the person under the insurance passes away. In the UK, when someone passes away, their families will not attain financial support unless the deceased has some form of life insurance, and it is for this reason that those who have dependents that rely on them should consider taking out some form of cover, so that they have the peace of mind of knowing that their loved ones are financially supported in the case that they meet their untimely demise.
However, acquiring the right form of life insurance to ideally reflect your circumstances the best is often a difficult procedure, as is the entire process of ascertaining which type of life insurance is the most favourable for your family. Below is a quick guide on life insurance, which will detail you on the different types that you can acquire and the steps to take in order to do attain this.
Key points to remember when taking out life insurance
1) Remember to give a comprehensive account of your medical history when applying for your insurance, as abstaining or withholding any information from your provider could result in your entire cover being voided in the future, and your family not receiving the payout that you were contributing towards. This includes any history of alcohol or drug abuse, your smoking status, or any outstanding medical condition that you may have.
2) Look at the age thresholds included in your insurance agreement, as many will provide you cover up until you reach a certain age, and will then terminate your payout arrangement after this period has expired.
3) Look at whether your cover has cash-in value, and ascertain whether you actually desire to have this included at all.
4) Check if your cover is relatively lenient with you in the case that you miss a couple of your contributions in the future. Some will allow you to proceed without penalty, but some will instigate fines or even cancel the cover if it arises that you have failed to make your payments.
5) Look at the general financial burden that the cover will place on your income, and seek the advice of a financial expert, such as Money Expert, in order to be given a clear indication of the best suited cover for your circumstances.
6) See if you are already covered in some way through a workplace scheme or mortgage policy, as you will not need to acquire further life cover if you already have some form of life insurance.
7) Remember to look at how tax will factor in with your policy. Many life insurance policies will have payouts that are applicable for inheritance tax, and this can only be bypassed if they are placed into a trust fund. Consider talking to a financial advisor if you believe your payouts will be taxed, as this can often be quite a complex issue to work around.
8) Ensure you are on the right type of life cover, as there are four main types of life insurance, that will be discussed below, which are ideally suited to people of different circumstances.
9) The younger you are, the more beneficial it often is to acquire some form of life cover, though this is entirely dependent on how financially secure your family is as a whole, and of course, whether you have any dependents at all.
10) All life insurance companies are bound to Financial Conduct Authority (FCA) policy which gives you 30 days to cancel your insurance if you decide that you no longer need or want it anymore.
11) Think about putting your life insurance policy into a trust fund as this will avoid inheritance tax conflation later on down the line, and could lead to a quicker payout as well.
Types of life insurance
There are four main types of life insurance that you can acquire in order to give you peace of mind in the case that you pass away. All are wildly different in their payout structures, and often necessitate different levels of contributions as well. These follow as: Level-term, decreasing-term, family income benefit and whole of life insurance.
Level-term life insurance
Level-term life insurance is the most basic form of cover that you can require, and essentially consists of your family receiving a one-off lump sum payout in the case that you die during the cover term. It is important to remember that payouts are only applicable during you cover term, and you will have to either renew or find a new provider when your original term comes to an end. Level-term insurance is aptly named, as the total amount of money you are required to pay, and the total amount you are covered for stays the same throughout the duration of your arrangement, though in certain rare cases you may have to pay slightly more on your monthly or yearly premiums.
Level-term insurance policies are recommended to family men who have high value mortgages that they pay on an interest only basis, as the lump sum should be sufficient for families to deal with this financial burden in the immediate future. Moreover, families who have teenage and university aged kids might consider this form of cover, as the lump sum money can ensure that they receive a platform in which to build on with the financial backing they have received.
Decreasing-term life insurance
As it sounds, decreasing-term policies consist of you being covered for a lower amount for each year that your policy is present for. Because of this, these forms of cover are typically characterised as being vastly cheaper than level-term insurance deals, though there is the added risk of your family being financially less well off in the case that you die towards the latter stages of your agreement.
However, if you are someone who has a steady income, and makes regular contributions towards your mortgage repayment, then paying less on your cover might be beneficial as your family will probably not need such a high level of financial support in the event you die later on down the line.
Family income benefit life insurance
Family income benefit life insurance is similar to decreasing-term life insurance in the sense that the amount you are covered for gets lower as time goes by. The major differentiation however is that if you pass away, your family will receive their payout in multiple sums, rather than being given it in one lump sum. This can either be done on a yearly, quarterly or monthly basis, but it means that your family are given smaller forms of financial support until your cover expires.
The major upside to this policy is that you can plan your familyís finances well in advance, by simply identifying how much you earn each month to subside your expenditure, and then setting your families monthly payouts at the same level in the future. So if you receive £3000 each month on your post-tax income, then you can ensure your insurance payouts are set at this level until you pass away.
However, this can be counterproductive if you pass away only a few years before your deal expires, as your family will only receive cover for a short period before your life insurance package expires. However, if you are aware that your family has a number of outgoings that go to different places such as the council, school and private tuition fees, transport and utility bills, then acquiring this form of cover should be considered as it will help uphold your family on a consistent basis in the event you pass away. Moreover, remember to look at whether your insurance deal has a fixed rate increase facility attached to it, as this could ensure the amount your family receives when you die rises each year at a set rate, meaning they will be better placed to deal with inflation on a yearly basis.
Whole-life insurance deals cover your family throughout your life, though because of this it means that they are typically far more expensive than other forms of term based cover. Under whole-life insurance, the family of the deceased will receive a lump sum payout, so long as the person who took out the cover maintained their contributions and made them all on time. There are two types of whole-insurance that you can acquire which are: Balanced cover and maximum cover
Balanced Cover- Balanced cover is the most common type of whole-life insurance that is taken out and consists of half your insurance contributions being placed into an investment fund and the other half being placed into your familyís potential payout out. The merits of this type of cover are that you obviously stand to expand your premium pot through the investment aspect of your cover, though you also stand to lower its value if the investments go sour.
Maximum Cover- Maximum cover is when you are insured for the entirety of your life, but are given the guarantee that your premiums will not rise for the first decade of your arrangement. After this comes to an end, an evaluation of your situation will take place, and you may be subjected to higher payments.
Benefits to look out for when consider life insurance
As well as the basic premiums that are paid out in the case that you die, there are also a number of other benefits that come along with many life insurance deals that you should consider when assessing the market. These follow as:
Fixed rate inflation facility
These clauses are often included in a number of insurance deals, and consist of your families payouts rising each year in accordance with the inflation rate in the UK. Often packages with these included make them more expensive, so you should decide whether you are willing to pay more with your contributions to ensure that your family receives regular premiums that are suitable for the increasing financial burdens that come each year.
Waiver of premium facility
It is worth looking at whether your insurance policy has a ëwaver of premiumí facility attached to it, which will make sure that your contributions towards your cover keep being made in the case that you become incapable of undertaking work due to illness, disability or general health problems.
Some insurance deals will allow you to switch your type of cover from one form of life insurance to another, which might be beneficial if your financial situation changes, or if you obtain a greater number of dependents over the course of your policy. For example, someone who signed up for the cover with only a partner, and then had two children 5 years into the deal, may require a different type of cover than when they first signed up to the long term arrangement. Bear in mind that if you do change, you will have to give new medical documentation to prove your physical condition, and this may be a lengthy procedure.
Look at whether your life insurance has a renewal clause in it, which enables you to take out a new policy in the future with mirrored terms of your current deal. Although you will be required to give new medical information about yourself, youíll benefit from the continuity of the arrangement, and might be sought after for young family men, who are typically offered smaller insurance terms and will benefit the most from having a renew clause included.
As with inflation protection clause, this often adds to the overall costs of your insurance, so it is worth looking into and measuring against your circumstances before securing an acquisition.
Where to look to find the best insurance deals
There are thousands of life insurance providers in the UK, ranging from large companies such as Aviva, to substantially smaller companies. In order to ascertain the best deal out there on the market, using a comparison site such as Money Expert is essential, and you will be given a broad range of options and quotes to choose from so that you acquire the optimum life cover for your unique set of circumstances. Remember to consider the benefits and clauses attached to your cover as well as the costs, as these will be essential in your acquisition of the best deal for you.
However, many banks, credit card organisations, mortgage providers and independent brokers can also provide you with advice and insurance products for your cover purposes, so it is worth considering all options before purchasing your insurance.