Beginners guide to life insurance…
th Feb 2018 |
Take the mystery out of life insurance with our beginners’ guide, then run your comparison quotes to find the right deal for you.
If you thinking about life insurance, you’re wondering how much cover you need? How long you need it for? And where to get the best deal?
At first life insurance, can seem complex and it’s not always easy to work out what cover is right for you.
Is ‘life insurance’ the same as ‘life assurance’?
For the most part yes, they but pay out a tax-free lumps sum on the death of the person insured.
However, strictly speaking, life insurance pays out if something happens to you, whereas life assurance pays out when it does.
So, cover for a fixed term is life insurance, whereas a whole of life policy would be considered life assurance.
Now this should not cause a problem as these days fixed term life insurance policies can run up to age 90, next birthday, meaning whole of life policies are best used nowadays for paying inheritance tax, as they are more expensive than the alternative term life insurance option.
Types of life insurance policy
We have already identified that whole of life insurance is expensive and mainly suited for the express purpose of paying inheritance tax and that opting for term life insurance where you’re covered for a fixed period, at a fixed price is the most popular option.
So now we come to what you need to protect? your mortgage, your dependents, or simply funeral costs?
For a repayment mortgage loan, a reducing term insurance policy is your minimum policy requirement and the fixed cost is lower, because of the cover amount shrinking year on year in line with the outstanding loan balance. A reducing term insurance policy is most commonly referred to as Mortgage Protection Insurance.
Level Term Insurance
Protecting your dependents is about replacing the loss of your income during your working life should the worst happen. So, to do this you need a level term insurance. Level term insurance provides a fixed level of cover for a fixed cost over a fixed period.
Convertible Term Insurance
To provide both flexibility and best value on your level term policy, you can include an optional continuation option. A continuation option allows you to extend your original cover term in the future without having to provide any new medical information.
Most people to cover themselves to age 65 for a higher level of cover and then use a continuation option to reduce the cover level, but extend the cover term up as far age their 90th birthday.
This makes sense because you don’t need as much cover when you retire, as you will have a pension and no more mortgage repayments and ideally if you have children they are now independent.
Pension Term Insurance
You may not have heard of this type of life insurance, at it only applies to people who are in paid employment that don’t already have life insurance paid for by their company. If you are one of these people, then pension term insurance may be for you. Life cover of up to 4 times salary gets full tax relief on the premium.
Whole of Life Assurance
As the name suggests it will paid out regardless of age, but thus can improve quite expensive, also in terms of cover levels you need more before and less after retirement, so convertible term life insurance is typically a better and more cost-effective option.
If you are concerned about your dependents having to fork out large amounts to the tax man in inheritance taxes after your death then, you can use whole of life insurance, the proceeds of which can be used to paid this tax and keep it in the hands of dependents.
Over 50s life insurance plans
Over 50s life insurance plans are designed for those aged 50-80, although they can be bought by those of other ages.
There are no medical questions or assessments of the applicant’s medical health or history. Everyone aged 50-80 is guaranteed to be accepted.
This type of cover charges a fixed premium which typically stops at the age of 85 or 90, but cover lasts for the policyholder’s whole life.
Over 50’s plans have a qualifying period – usually 12 or 24 months – during which, if the policyholder dies, only the premiums will be returned and not the benefit amount.
Although this product is often advertised as ‘over 50s life insurance’, you should be aware that there are a variety of options for those seeking life insurance in later life, and these other options may be more suitable to their needs.
Other methods of protection
Which policy type is right for you?
If you’re wondering what kind of policy is best for you, it’s important to think about your personal circumstances.
The more cover you buy, the bigger the premium, so obviously, you need to factor in affordability
For example, if you have a permanent dependant, such as a child with a disability, then term insurance cover to age 90 might be best.
However, if you have no dependants and simply want to ensure your partner isn’t left struggling if the worst happened then convertible term insurance might best suit.
Think carefully about what you want your policy to pay for, and talk to an adviser if you need help.
How much cover do you need?
It can be hard to work out how much cover your loved ones might need if you die.
Again, talking to an adviser can help as they have experience in working this out.
You should tally up any outstanding debt, including your mortgage. Then, think about how much of a contribution to the family finances you’re responsible for.
In an ideal world, you’d want to match that, at least while your children are dependant. However, the more cover you buy, the bigger the premium, so obviously, you need to factor affordability in, too.
And don’t forget to factor any additional sources of income your family would be able to draw on as it could mean you need less protection.
Would they receive any death in service pay-out from your employer if you died? Does your partner bring in a salary and could they continue to do so if they became a single parent? If the answer is yes, then you may need less cover than you thought.
If you’re single and have no dependants, then you might decide you don’t need any insurance. However, it could still be a good idea to consider critical illness cover and/or some form of income protection insurance, so you’re financially secure no matter what.
Why stay-at-home parents need cover too
If you’re part of a couple and one of you doesn’t work, it might be tempting to assume you only need to insure the bread winner.
Did you know…?
Although joint life cover is usaully cheaper than having two separate policies, it will only pay-out once on the first claim and then finish.
But that really underestimates the value of what a stay-at-home parent contributes.
If they were no longer there, the remaining partner could be left paying for child care, and maybe even a cleaner or housekeeper.
It really makes sense to consider insuring both partners, through a dual cover policy.
Should you have joint, or dual cover?
There is very little difference in the cost of joint and dual life cover and dual life will pay out separately on each life. Dual life insurance also allows you have different levels of cover on each life, so again this is another very good reason to choose dual life over joint.
Would your ‘death in service’ work cover be sufficient?
Some employers give their staff some extra financial security by providing a ‘death in service’ benefit.
With death in service benefit, if you die while working for that employer then they will pay an agreed amount. That amount varies, but is usually a multiple of your salary, for example, a lump sum payment of four years of your pay.
You might think that that’s sufficient cover. If you’ve separate mortgage protection and your kids are about to leave home, but would it be sufficient to protect your partner, how long might it last?
If it wouldn’t cover all your family’s costs then it’s a good idea to still consider a separate term life insurance policy, which also covers your partner on a dual life basis, chances are it’s a lot less expensive than you think.
If you leave or lose your job, you’re likely to lose any insurance benefits offered by your employer
Tax on life insurance pay-outs
Life insurance pay-outs are not liable to income tax or capital gains tax but, depending on the circumstances, your heirs could be liable for inheritance tax on the funds.
This can be avoided by life insurance written in trust, a straightforward procedure that your adviser can help you with.
Making a will can also have major benefits in terms of arranging your affairs appropriately and efficiently.
How can you keep the cost of your policy down?
The first step to keeping your premiums low is to compare different providers, so you can find the best cover for the right price.
It’s possible that those with existing life insurance policies could benefit by shopping around, comparing and switching, but you also need to remember that age plays a major factor in calculating premiums.
As you’re less of a risk when you’re younger, the older you are the higher your premiums, and if you have pre-existing medical conditions may struggle to find a deal as good as the one with your current provider.
There are other ways you can control the cost of your cover. If it’s suitable, term insurance is cheaper than whole-of-life cover.
If you’re fit and healthy then you’re a better bet for life insurers and they’ll offer you cheaper premiums as a result. So, to really reduce the cost, ditch the cigs, cut back on your drinking and get fit.
We hope you find this information useful, but should you need to speak with a Life Insurance specialist simply call: 01 845 0049
Ken O’Gorman – QFA
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