Life Insurance Guide
Put in simple terms, life insurance covers your family's financial needs should you die. If you are the main breadwinner or are a large contributor to the family's financial pot, then this will give you the peace of mind that loans are paid off and long term financial goals achieved if you are no longer around to pay for them. The money can be used to pay off debts or large expenses such as mortgages, school fees or childcare. It can also be used to shore up enough financial support to replace a lost income so your family can cover day-to-day living expenses - utility bills, food and clothing.
This type of cover is all about relieving your loved one's financial woes in the event of your death. Incidentally, life insurance means the same as life assurance which is a more accurate label because ultimately there's no way out of death ... it is assured for us all!
Types of cover
There's quite a list of types of life cover available and we've covered the main ones below. The terms and conditions of each policy will vary, but in all cases, the premiums reflect the benefits of each type.
- Level term insurance - pays out a sum of money on death. Throughout the policy's term the actual amount that will be paid remains fixed.
- Decreasing term insurance - used to cover financial obligations such as a repayment mortgage. The pay-out sum decreases over the course of the policy's term in line with the loan's decreasing financial obligation.
- Increasing term insurance - designed to combat inflation, so the sum assured rises appropriately.
- Whole-of-life insurance - one of the most expensive forms of life insurance as it comes with a guarantee to pay out when the policyholder dies at any age or time provided premiums are made without interruption.
- Family income benefit - pay-outs made to a family are made in regular instalments rather than a one-off lump sum. The extent of such cover is worked out by your current monthly household bills - that's the minimum sum you want paid to your family each month in the event of your death.
- Endowment insurance - often wrapped up as the means to protect mortgage obligations and works as a savings scheme with life insurance included.
- Renewable term insurance - on expiry, this type of policy may be renewed without a health check up.
- Convertible term insurance - a level term policy arrangement which combines the option to switch to whole of life or endowment.
Look under the bonnet
Careful thought must be given to each type of insurance, so you understand exactly what the benefits are and how the length of term and amount insured chosen can play a part. For example, if you take out a family income benefit insurance plan for, say, 20 years and you die within the first five years of its start up, then your family would receive monthly income pay-outs for 15 years. But were you to die in the last five months of the policy term, then regardless of how much in premiums has been paid in, your family would only receive five months' worth of pay-outs.
There are two different types of life insurance premiums to get to grips with.
The first is 'guaranteed' and the second 'reviewable'.
Guaranteed premiums means the insurer guarantees the policyholder that premiums will not be increased during the policy's entire term. No one will be surprised to learn that a policy with reviewable premiums means that the company can (and will) review a policy at intervals during the term. Policyholders will most notice the difference between these two in the premiums they are quoted. Naturally, you can expect the guaranteed premiums policy to be more expensive.
Money saving tips
- Before rushing out to buy life cover, check you haven't already got it wrapped up in an existing policy such as cover for a mortgage or pension or through your employer.
- Quit smoking! You always knew it wasn't doing you any good puffing on that cigarette and the premium difference smokers suffer really does bear out that you're paying through the nose. Anyone who has quit for a year starts to reap the premium benefits.
- It never pays to lie on a life insurance form. If the policy is used by your loved ones to make a claim and an illness/previous accident or condition is not disclosed, the whole process will grind to a halt and may even disqualify against any payment being made.
- Inheritance tax (IHT) burdens can be lifted from the pay out of a life insurance policy by having it 'written in trust'. With a trust arrangement, the money from the policy is paid directly to a named individual (beneficiary) and avoids the IHT charge on the policyholder's estate.
- With life insurance it's always worth checking where you can 'double up' on policies. For example, a life insurance policy with critical illness cover included, means you don't need two separate policies. Similarly so with joint life insurance which is where a pay-out is made to the surviving policyholder on what's called a 'first-death basis'.
- The way life insurance works cost-wise is the older you are the more expensive such cover is - quite straightforwardly the older you are, your death is expected sooner rather than later. No-one wants to contemplate their death which is why most of us put off dealing with this form of financial planning. Best advice is don't delay - you'll save money and give yourself and your dependants peace of mind.
- Insuring the insurance - it is possible to arrange for a waiver of premiums in the event that you are not able to pay should you lose your income due to health reasons.