The Complete Guide to Life Insurance
When getting life insurance to secure the future of your dependents, make sure you review your policy to avoid useless premiums. Follow our tips to save £100s.
Do You Need Life Insurance?
Life insurance is there to financially look after anyone who would lose out if you died. This means you need it if you have financial dependents such as a partner or children. If you are footloose and fancy free with no-one who relies on you for financial support you probably don’t need life insurance.
Types of Policy
There are three types of life insurance. All require you to pay monthly premiums in return for a payout if you die, or (usually) if you are diagnosed with a terminal illness and are expected to die within 12 months.
- Level term insurance. This pays out a set amount if you die within a certain period of time eg. £100,000 if you die before age 60. This is often the cheapest way of providing cover, but you will pay more if you want your payout to increase with inflation.
- Mortgage term insurance. This pays off the balance of your mortgage if you die within the mortgage term. The amount paid out therefore decreases over time, and will not be enough to cover the additional living costs of your loved ones.
- Whole of life insurance. This provides a lump sum whenever you die, so is more expensive because it will have to pay out. The amount paid out is not normally guaranteed and instead depends on investment performance, making it a more risky option.
How Much Cover Do You Need?
Most people opt for level term insurance. In this case you need to think carefully about:
- The payout – how much would your loved ones need? For example, you may want enough to pay off the mortgage and other debts, and provide a decent standard of living for the next ten years. A rough rule of thumb is 10 times your annual income.
- The term – you only get a payout if you die within a specific time e.g. 10, 20 or 25 years. Many people choose when their children leave home or university, or when their mortgage term ends.
- External cover – Check if your employer would provide any payout if you died (often known as a ‘death in service benefit’). This may reduce the amount of cover you need, but bear in mind the benefit will be lost if you change jobs.
How Much Will It Cost?
For example, take a 30 year old male non-smoker who wants level term insurance of £200,000 if he dies within the next 25 years. He can expect to pay about £10 a month. But if he wanted £600,000 worth of cover, his monthly premium might increase to about £25.
Remember that if you don’t die within the set term, you will not receive a penny back in the premiums you have paid.
If you are a couple you should get a quote for a joint policy AND two single policies to see which works out best value. But remember a joint policy will only pay out once, so if one of you died the other would need to take out a new policy.
What Else Affects Premiums?
Premiums will increase the older you are, and if you’re a smoker. This is simply because there is more chance of you dying within the term. Insurers may also take into account your profession and where you live.
There is nothing you can do about most of these but you can certainly give up smoking. Being a ‘non-smoker’ for insurance purposes means you have not smoked in the past year, but don’t be tempted to lie because this may invalidate your policy.
How Do I Buy Life Insurance?
The cheapest brokers are to be found online, use an insurance comparison tool to put you in touch with a broker who can find the perfect policy for you at the best price.
There are two different ways brokers can charge you for advice, and some offer you both options:
- ‘Fee-free’. The broker gets paid a commission from the insurer for your business, but does not charge you an upfront fee.
- Execution-only. The broker gives you their commission in the form of cashback but charges a small upfront fee of about £35 instead. These may work out the cheapest because they can offer the lowest premiums.
If you prefer face-to-face advice, you should contact a local Independent Financial Advisor (IFA) who specialises in life insurance. This will be more expensive, but if you have particularly complicated circumstances or are generally unsure about buying life insurance it is worth paying. You can find an IFA near you here.
Protect Your Pay-out from the Taxman
A life insurance payout will normally be added to the total sum of your estate for inheritance tax purposes. Inheritance tax is due if your assets are valued over the current threshold of £325,000.
Putting a life insurance policy into a trust protects it from inheritance tax, and is normally a free and straightforward process. Ask your broker or insurer for more details. Most insurers will simply provide you with a form to fill in.
The main advantages of a trust are:
- To save your loved ones potentially thousands of pounds in inheritance tax
- To ensure the money is paid quickly, as your family will not have to go through probate to access the payout
- It also ensures the money will not be used to pay off any of your debts.
You do not have to write your policy in trust from the outset. If you prefer, you can add the trust at a later stage once the policy is running.
As with any insurance policy, there are exclusions and limitations often found in life insurance. You will not receive a payout if you commit suicide, die from a drugs overdose, or if you are killed in an accident involving a ‘risky’ sport such as motor racing, hang gliding or deep sea diving, for example. Most policies will also not pay out if you are killed in a warzone.
If you do enjoy risky sports, or expect to find yourself in a warzone, it may still be possible to arrange cover but at a much higher price because the risk of you dying is much higher.
Don’t Be Stuck with Old and Expensive Cover
If you took out a life insurance policy years ago, it is worth shopping around today to see if you can get cheaper cover elsewhere. The advent of online brokers means that life insurance is now much quicker, simpler and cheaper to arrange than it used to be. Although you will now be older, you may still be able to find a cheaper policy elsewhere.
If that is the case, all you need to do is cancel your old policy and set up your new one – but as always check the small print to see if you are buying the right level of cover.