We understand that life is full of uncertainties, and while we can’t predict the future, we can certainly prepare for it. That’s why we’ve dedicated this space to help you better understand the world of life insurance.
Life insurance isn’t just a policy; it’s a promise.
A promise to ensure that your loved ones remain financially secure, even in your absence. Whether you’re a homeowner, a first-time buyer, or simply someone who values the comfort and security of their family, this section is tailored for you.
We go into the significance of life insurance, breaking down its complexities into easy-to-understand segments.
From term life insurance to whole-of-life cover, we’ll explore the diverse range of policies available, their unique benefits, and how they fit into the larger picture of your family’s financial planning.
The need for life insurance
Life is unpredictable.
While we cherish the moments of joy and happiness, it’s equally essential to prepare for unforeseen circumstances.
Life insurance acts as a financial safety net, ensuring that your loved ones can maintain their standard of living, even in your absence.
Whether it’s paying off a mortgage, covering education costs, or simply managing day-to-day expenses, the benefits of a life insurance payout can be invaluable.
If the worst were to happen, could your family:
- Pay the mortgage?
- Pay the monthly bills?
- Pay for your funeral?
- Meet day-to-day costs?
A safety net in uncertain times
Imagine a family: two working parents, two young children, and a mortgage on a lovely home.
Every month, bills are paid, children attend school, and the family enjoys weekend outings. Life is comfortable, predictable.
But what if one of the parents were to suddenly pass away?
The emotional toll would be immeasurable, but there would also be immediate financial implications. Would the remaining parent be able to manage the mortgage, bills, and children’s education on a single income?
This is where life insurance steps in.
It ensures that, even in the face of such a tragedy, the family’s financial stability remains intact. The mortgage can continue to be paid, children can pursue their education, and the day-to-day expenses don’t become an insurmountable burden.
Beyond immediate expenses, life insurance can also serve as a legacy for future generations. Whether it’s seed money for a grandchild’s business venture, a contribution to a beloved charity, or simply ensuring a comfortable life for one’s spouse in their golden years, life insurance provides the means to leave a lasting impact.
Types of life insurance
Researching the world of life insurance can initially seem bewildering, given the variety of policies available.
However, understanding the nuances of each type can help you make a decision that aligns with your family’s needs.
Here’s a breakdown of the most commonly used life insurance policies:
Level Term Insurance
This is the most straightforward form of life insurance.
Level term assurance provides death cover for a specified term, typically ranging from 10 to 30 years. If the insured passes away within this term, the beneficiaries receive the death benefit. However, if the term expires and the insured is still alive, no payout is made. It’s an affordable option, especially for younger individuals seeking substantial coverage.
How does level term life insurance work?
Whole-of-Life Assurance
As the name suggests, this policy covers you for your entire life.
Unlike term insurance, there’s a guaranteed payout upon the death of the insured, making it a more expensive option. Part of the premiums often goes into an investment fund, which can grow over time, creating a modest cash value.
Joint Life Insurance
Ideal for couples, this policy covers two lives.
The sum assured/death benefit is paid out upon the first death, after which the policy ends. It’s a cost-effective way for couples to ensure financial security for the surviving partner.
Decreasing Term Life Insurance
Tailored more for mortgage holders, the cover amount decreases over the policy’s term, typically in line with the outstanding mortgage balance. It ensures that if the insured passes away, the remaining mortgage can be paid off, relieving the family of this significant financial burden.
How does decreasing life insurance work?
Family Income Benefit
Unlike traditional lump-sum policies, FIB offers regular, tax-free payments, ensuring a consistent income stream for loved ones. These policies tend to have lower premiums compared to traditional level life insurance.
How does Family Income Benefit work?
Over 50s Life Insurance
Specifically designed for individuals over 50, this policy guarantees acceptance without the need for a medical examination. Premiums are fixed, and while the cover amount might be lower compared to other policies, it can be a valuable option for leaving a financial gift or covering funeral expenses.
What can life insurance be used for?
The payout received from a life insurance policy can be used in many ways.
This flexibility ensures that the financial needs of the beneficiaries are met, especially during challenging times.
Some common uses include:
Mortgage and Debt Repayment: One of the primary uses of a life insurance payout is to clear outstanding debts.
Daily Living Expenses: The payout can cover everyday expenses such as utility bills, groceries, and travel.
Children’s Education: Beneficiaries can allocate funds towards tuition fees or school trips.
Funeral Costs: Funerals can be expensive, and a life insurance payout can help cover these costs.
Investment: Some beneficiaries choose to invest a portion of the payout, creating a source of future income.
Legacy or Inheritance: The payout can be set aside as an inheritance for future generations.
Medical and Therapy Bills: If the deceased had ongoing medical expenses or if the family requires therapy and counselling, the payout can be used to cover these costs.
How much life insurance?
Choosing the right amount of life insurance cover is a delicate balance.
Too little, and you risk leaving your loved ones with financial challenges; too much, and you might be paying higher premiums than necessary.
So, how do you determine the ideal cover amount that aligns with your family’s needs?
Factors to Consider:
Outstanding Debts: The primary purpose of life insurance is to ensure that your family isn’t burdened with debts in your absence. Consider mortgages, personal loans, credit card debts, and any other financial obligations.
Future Expenses: Think about the significant future costs your family might face. This includes children’s education, weddings, and even the retirement needs of your spouse.
Family’s Lifestyle: Aim to maintain the standard of living your family is accustomed to. Estimate the monthly expenses, from utility bills to leisure activities, and multiply it by the number of years you’d like to support them.
Existing Savings and Investments: Deduct any savings, investments, or assets that can be liquidated. These funds can offset some of the financial needs, reducing the required cover amount.
Inflation: The cost of living will rise over time. It’s essential to factor in inflation, especially if you’re looking at long-term cover.
Regular Reviews
Life is dynamic. Major life events like the birth of a child, purchasing a new home, or even changes in your health can influence the amount of cover you need. It’s advisable to review your policy every few years or after significant life changes to ensure it remains aligned with your family’s evolving needs.
Additional Features
While the primary purpose of life insurance is to provide a death benefit to beneficiaries, many policies offer additional features and riders that can enhance the coverage. These options allow policyholders to tailor their insurance to their specific needs, ensuring comprehensive protection.
Critical Illness Cover
Critical illness cover provides a lump sum payment if the insured is diagnosed with a specified illness, such as cancer, heart attack, or stroke. It can help cover medical expenses, lost income, and other related costs, offering financial support during a challenging time.
Waiver of Premium
If the policyholder becomes seriously ill or disabled and is unable to work, this feature waives the insurance premiums, ensuring the policy remains active without any financial burden on the insured.
Child Cover
Child cover provides a payout if your child suffers from a severe illness or injury. It can assist with medical bills, therapy costs, and other related expenses, ensuring the child receives the best care possible.
Guaranteed Insurability
Life is full of milestones – marriage, the birth of a child, purchasing a new home. Guaranteed insurability allows the policyholder to increase their cover amount during such significant life events regardless of their health.
Cost Factors
While understanding the benefits and types of life insurance is crucial, it’s equally important to grasp what determines the cost of a policy.
Premiums can vary widely based on several factors, and being aware of these can help you make an informed decision and potentially reduce costs. Here are the primary factors that influence life insurance premiums in the UK:
Age
Typically, the younger you are when you take out a policy, the lower your premiums. This is because younger individuals pose a lower risk (of death) to insurers.
Health
A medical examination might be required when applying for life insurance. Factors like weight, blood pressure, cholesterol levels, and overall health will influence premiums. Those with pre-existing conditions may face higher premiums.
Lifestyle
Smoking, excessive alcohol consumption, and recreational drug use will lead to higher premiums. Additionally, high-risk hobbies like skydiving or motor racing can increase premiums.
Policy Duration
The length of the policy can influence premiums. For instance, term life insurance for a 10-year term will be cheaper than a 30-year term.
Cover Amount
The higher the sum assured or death benefit, the higher the premium. It’s essential to balance the need for coverage with the associated costs.
Type of Policy
As discussed earlier, different policies come with varying features and benefits. Whole-of-life insurance, which guarantees a payout, will generally have higher premiums than term insurance.
Additional Riders
Opting for extra features or riders, such as critical illness cover, will increase premiums.
Occupation
Jobs that are deemed high-risk, such as construction work or deep-sea diving, will lead to higher premiums due to the increased risk associated with these professions.
Family Medical History
If there’s a history of hereditary diseases in your family, it might influence your premiums, as insurers could consider you at higher risk.
Advanced options
We recommend you seek advice about these options before making any decisions.
Life of another
“Life of Another” is a term used within the life insurance industry in the UK to describe a policy where one person takes out life insurance on another person’s life.
This means that the policyholder is not the insured individual, but they are the one who pays the premiums and will receive the sum assured upon the death of the insured.
Life of another will speed up the payment and is useful for many scenarios including: mortgage guarantors, family protection.
Trusts
When a life insurance policy is placed “in trust”, its ownership is transferred to a trust, separating it from the policyholder’s personal estate. This arrangement offers several benefits.
The policy payout might be exempt from inheritance tax, ensuring beneficiaries receive a larger portion.
Beneficiaries can receive the sum assured without waiting for the probate process, speeding up access to funds.
The policyholder can dictate how the money is distributed and it is protected from potential creditors.
But I already have mortgage life insurance
Having mortgage life insurance is a good start.
But if you have a spouse and dependents then there is likely to be a need for additional cover. While you have protected the mortgage debt, your family still need money each month to live on.
A separate family protection policy can help with this.
How many policies can you have?
You can have as many policies as you feel you need, and can afford. Insurers will ask about any existing cover, and what it’s purpose is when you apply.
A common arrangement will be to have one or two mortgage related plans protecting the mortgage, and then a further one or more policies for family cover.
