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A guide to everything you need to know about life insurance
As with all forms of cover, acquiring life insurance is not a necessity but it is typically most beneficial to people who have dependents that rely on them financially.
Life insurance is a form of cover that ensures a person’s family will receive financial funding in the event of the death of the person covered. In the UK, when someone passes away, their families will not be entitled to any financial support unless the deceased has some form of life insurance, and it is for this reason that those who have dependents that rely on them should consider taking out some form of cover.
However, deciding on the right form of life insurance to best suit your circumstances can sometimes be difficult and confusing. Here is a quick guide on life insurance, which explains the different types that you can acquire and what you can do in order to do attain this.
Key points to remember when taking out life insurance
1) Always give a comprehensive account of your medical history when applying for insurance, as withholding any information from your provider could result in your entire cover being invalid in the future, and your family not receiving the payout.
2) Look at the age thresholds included in your insurance agreement, some may only provide you cover up until you reach a certain age, and will then terminate your payout arrangement when this period has ended.
3) Check whether your cover has a cash-in value, and decide whether you really need to have this included at all.
4) Check how lenient your cover is in the case that you miss a couple of your contributions in the future. Some will allow you to proceed without penalty, but some will issue fines or cancel the cover if you miss payments.
5) Seek advice from a financial expert in order to obtain a clear indication of the cover best suited for your circumstances.
6) Check if you are already covered through a workplace scheme or mortgage policy, as you will not need to acquire further life cover if you already have some form and amount of insurance elsewhere.
7) You may want to think about putting your life insurance policy into a trust fund to avoid having to pay inheritance tax later on down the line, and this could lead to a quicker payout too.
Types of life insurance
There are four main types of life insurance that you can acquire, all of which are very different in their payout structures, and also often require different levels of contributions. These are as follows:
Level-term life insurance
This is the most basic form of cover you can acquire; essentially it consists of your family receiving a lump sum payout if the insured dies during the term of the cover. Do remember that payouts are only valid during you cover term, at the end of this you will have to either renew or find a new provider. With level-term insurance the total amount of money you are required to pay and the total amount you are covered for stays the same throughout the duration of your arrangement.
Level-term insurance policies are recommended to those who have high value interest only mortgages, as the lump sum should be sufficient to cover the capital owed.
Decreasing-term life insurance
As it sounds, decreasing-term policies consist of your cover decreasing each year that your policy is in force. Because of this, these forms of cover are typically much cheaper than level-term insurance deals, though there is the risk of your family being financially less well off if you were to die towards the later stages of your agreement.
However, if you have a steady income, and make regular contributions towards your mortgage repayment, then it may be beneficial to pay less on your cover as your family might not need such a high level of financial support if the worst should happen.
Family income benefit life insurance
Family income benefit life insurance is similar to decreasing-term life insurance in the sense that the amount you are covered for lowers during the term of the policy. The major difference, however, is that if you pass away, your family will receive a regular payout instead of one lump sum. This can either be on a yearly, quarterly or monthly basis until the cover expires.
The major advantage to this policy is that you can plan your family’s finances well in advance, by identifying how much you earn each month to subsidise your expenditure, and then setting the monthly payouts at the same level in the future.
However, this can be a disadvantage if you pass away near to the time your deal expires, as your family will only receive income for a short time before your cover expires. If your family has a number of outgoings that go to different places such as the council, transport and utility bills, then obtaining this form of cover should be considered as it will help support your family on a regular basis if you were to pass away. Remember to look at whether the deal has a fixed rate increase facility attached, as this could help you deal with inflation as the amount your family receives will increase on a yearly basis.
Whole-of-life insurance covers your family throughout your life, although it is typically more expensive than other types of cover because of this. Under whole-of-life insurance, the family of the deceased will receive a lump sum payout, provided that the policyholder maintained their contributions and paid them on time. There are two types of whole-of-insurance that you can acquire which are: Balanced cover and maximum cover.
Balanced Cover is the most popular and consists of half your insurance contributions being placed into an investment fund and the other half being placed into your family’s potential payout pot. The advantage of this type of cover is that you stand to increase your premium pot through the investment aspect, though you also stand to lower its value if the investments diminish.
With maximum cover you are insured for the whole of your life, but your premiums will not rise for the first decade of your arrangement. After this period, your situation will be evaluated and you may be subjected to higher payments.
Benefits to look out for when consider life insurance
As well as the basic premiums that are paid out, there are also a number of other benefits that accompany many life insurance deals that you should look out for when assessing the market. These are as follows:
Fixed rate inflation facility – These clauses are often included in a number of insurance deals, and consist of your families payouts rising each year in accordance with the inflation rate in the UK. These packages tend to be more expensive, so you should decide whether you are willing to pay more to ensure that your family receives regular premiums that are suitable for the increasing costs that come each year.
Waiver of premium facility – This will make sure that the contributions towards your cover continue to be made in the case that you become incapable of undertaking work due to illness, disability or general health problems. Again, this facility can make packages more expensive and you should decide whether it would be worth the increased cost.
Type-change clauses – Some deals will allow you to switch your type of cover from one form of life insurance to another. This might be beneficial if your financial situation changes, or if the number of dependents changes over the course of your policy as you may require a different type of cover than when you first signed up to the arrangement. If you do change, you may have to give new medical documentation to prove your physical condition, and this could take some time.
Renewal clauses – Look at whether your life insurance has a renewal clause in it, which enables you to take out a new policy in the future with the same terms of your current deal. Although you will be required to give new medical information about yourself, you’ll benefit from the continuity of the arrangement. As with inflation protection clause, this often adds to the costs of your payments, so it is worth looking into and measuring against your circumstances before making a decision.
Where to look to find the best insurance deals
Many mortgage advisors and independent brokers can provide you with advice and insurance products to meet your requirements, so it is worth seeking advice & looking at all options before purchasing your insurance.
Post courtesy of Money Expert.