Understanding your Life Insurance options
If your family couldn’t afford to be without your income, you can’t afford to be without life insurance.
Understanding your life insurance options thoroughly before taking out a policy is important; however, finding the right option to avoid under or over insuring yourself can be a difficult and time consuming task. This short guide highlights the major points to consider, ensuring that you find the option that suits your lifestyle at the premium that suits your budget.
What is life insurance?
Life insurance, sometimes referred to as life assurance, provides financial security for your loved ones. Depending on the policy type you purchase, in the event of your death during the policy term a lump-sum payment will be made to your dependents in order to provide a substitute for your income; or to settle any unpaid loans and mortgages.
Who needs life insurance?
Anyone with dependents, financial commitments or a mortgage should consider purchasing a life insurance policy. A life insurance policy providing adequate protection will offer peace of mind that if you should die within the policy term, your dependents will be financially provided for.
Choosing your life insurance term
Whatever type of life insurance you decide upon, it’s important to choose a policy term that suits your requirements. When deciding on the term length – that is, length of time to be covered for, you should consider when your dependents will no longer be wholly reliant on you and your income for support. An example of this would be to choose a term that will last until your large loans and mortgages are repaid in full, so that your loved ones will not become legally responsible for them in the event of your death. Or, you may wish to choose a term length that will last until you believe you will have accumulated sufficient savings elsewhere to provide for your spouse’s retirement, or pay for your children’s schooling or university fees; or simply until your children leave home or enter full-time employment.
Do I need a level, increasing, decreasing, or whole life policy?
Term Life insurance policies can be level, decreasing, or increasing in value. Level term life insurance will pay a guaranteed lump sum upon your death within the term, the value of which remains unchanged until the end of the policy. Decreasing term life insurance is commonly tied to your mortgage; the value of this policy gradually declines in line with the outstanding balance of your mortgage, so that if you died within the term your dependents would not become responsible for the debt. Increasing term life insurance is an option that offers the policy holder a greater level of flexibility by enabling them to increase the benefit value throughout the term.
Term life insurance policies are worthless at the end of the term, and carry no cash-in value at any time. However, whole life insurance policies double as investment vehicles. Whole life insurance policies run for the remainder of your life, as long as your premiums are maintained, and build savings through investment over time. They pay out accumulated returns to your dependents upon your death, whenever that may be, as long as your premiums have been maintained in full.
What type of life insurance is best for me?
The type of life insurance policy that is best for you will depend on your circumstances, and will be largely determined by what purpose the policy is serving:
If you want to ensure that your dependents are protected from becoming legally responsible for your mortgage or other debts upon your death, you should consider a decreasing term life insurance option that holds enough value to settle your debts at any time.
If you want to ensure that a lump-sum cash payment will be made to your dependents in the event of your death, and that that amount will remain unchanged over the policy term, you should consider a level term life insurance policy that will run until you have enough savings elsewhere to provide financially for your loved ones, or until your children have left home or entered full time employment.
If you wish to retain a level of flexibility within your life insurance policy, you may wish to consider an increasing term life insurance policy. These policies allow the policy holder to increase premiums throughout the term in order to raise the benefit amount in accordance with their changing circumstances; for example, having children or to mirror an increase in income.
If you are interested in providing a payout upon your death that builds wealth over time, you should consider a whole life policy, perhaps to fund your spouse’s retirement, or to form part of your estate as a gift to your benefactors.
To find the policy that suits your lifestyle, you should speak to an independent financial advisor for a quote tailored to your specific requirements.
What is a critical illness policy?
A critical illness policy provides a cash payout in the event that you are diagnosed with a pre-specified illness during the policy term. As you are much more likely to be diagnosed with severe illness than die during an insurance term, you are more likely to make a claim on a critical illness policy, which makes them very worthwhile. You are able to spend the payout during your lifetime; this can be very handy, particularly if you are unable to work for a period of time, or need to make modifications to your house or car. Critical illness policies are available on their own, or can be added to your life insurance policy at an increased premium. Many pay out on a severity basis, allowing to you claim partial amounts depending on the severity of your illness, and further claims later on if your condition deteriorates, up to 100% of the policy value.
Before taking out any critical illness policy you should understand which illnesses are included are which aren’t, and judge them on the range of illnesses covered; some life insurance providers cover more illnesses than others. You should also determine whether total and permanent disability is covered, as most providers class disability as distinct from illness.
What will affect my life insurance premium?
Various lifestyle factors will influence the cost of your life insurance policy. Premiums are determined by factors including sex, age, and whether or not you smoke. It is very important to tell the truth when applying for a life insurance policy regarding your lifestyle and habits; failure to tell the truth can allow your provider to refuse to pay out a claim later on, on the grounds of non-disclosure.
Also, the type of policy chosen and the amount of cover purchased will influence your premium, for example, life insurance policies that include investment, such as whole life policies, have higher premiums than level or decreasing term options.
How do I protect my life insurance payout from the tax man?
Any life insurance policy you hold at the time of your death will form part of your estate. As the current UK inheritance tax laws state that any part of your estate valued at over £300,000 will be taxed at a rate of 40%, a valuable life insurance policy can contribute a large part toward pushing your estate’s value over this threshold, particularly if you are also a homeowner. It is possible to ensure that your life insurance policy will not form part of your estate by writing the policy ‘in-trust’; whereby the policy payout goes directly to the benefactor, thus by-passing your estate. This can be set up by your solicitor or independent financial advisor.
Check the fine print!
Finally, be very sure that you know what you are buying when you take out a life insurance policy. When adequate protection is purchased from a regulated provider, life insurance is a worthwhile investment that will buy you peace of mind, and security for your loved ones; however, failure to check the facts can leave your dependents financially vulnerable after your death. Consult an independent financial advisor before taking out a policy, and get advice that is tailored to your personal financial situation and requirements.
Please note: this website, and the articles and information within it are based on journalistic research. It does not and should not be construed to constitute financial advice. Any information should be considered in regard to specific circumstances. All tips are followed at your own risk and should be followed up with your own research. For more please refer to our terms and conditions of use.