Why should you get life insurance?
Many people avoid thinking about what will happen to our money after we die. After all, we have to worry enough about money throughout our lives without thinking about what will happen to it after we’ve passed away.
However, taking steps now might save your loved ones from financial difficulty in the future. Life insurance is a policy that can give your family or dependants financial support and for this reason, it is often called the most essential financial product you can buy.
As with making a will, many of us delay getting life insurance; maybe because we’re focused on our day-to-day life or because we don’t know which life insurance policy is best for us.
This guide will show you the different types of life insurance policies so you can properly understand what exactly it is you need.
The types of life insurance we will be looking at are:
– Family income benefit
– Over-50s life insurance
The first half of the guide will be dedicated to explaining the ins and outs of term insurance. We will then look at other types of life insurance and finish off with the optional extras.
The most common form of life insurance is called ‘Term Insurance‘ (or Term Assurance) which is specifically referring to the fact that the policy has a term (years).
What is Term Insurance?
Term insurance is the most basic kind of life insurance. If you die within the agreed period of time, the payout will go to your chosen beneficiaries. The amount paid out is known as the “sum assured.” Most of these policies are set between 10 or 25 years but you can choose exactly how long you want the period of time to be.
If you die within the set period of time, the payout will go out to your beneficiaries. If you live beyond the term, the policy will not pay out and no premiums will return to you. It is important to read through the policy several times before buying as some covers won’t payout if you die too soon into the term. If you are diagnosed with a terminal illness, some policies will still payout but make sure you make sure this is the case.
Life insurance is not necessarily just for those at work. For example, if you’re a stay-at-home parent and not the breadwinner of the house, you might want to take out term insurance for the period of time the children are young enough to be living at home. This is so if you pass away, your beneficiaries will find it easier to pay childcare costs.
The Three Types of Term Insurance
Once you’ve decided to go for term insurance (where your life is covered for a set period of time) you then need to pick which kind of term insurance is best for you.
There are three main types:
– Level term insurance– With level term insurance the payout (or “sum assured”) will be the same throughout the whole set period of time, whether you pass away near the beginning of the term or near the end.
– Decreasing term insurance– This is the cheapest option to go for but the sum assured will decrease the further you go into the term. Often people will go for this if, for example, they need to pay back a debt so the sum assured will decrease alongside the debt to be repaid.
– Increasing term insurance – With this option, the sum assured will increase the further into the term you go. This is to give extra protection for the rising cost of living and growing expenses, for example, with a bigger family over the years. It will also protect your payout from inflation. As the cover increases over the years, so will the payments you need to put in.
How Long do I Need Life Insurance for?
There are two main reasons why most people take out life insurance:
– To protect loved ones after they pass away
– To cover any debts that need to be paid off, such as; mortgages, credit cards, and loans
Before you decide how long you want life insurance, think about the reasons why you are getting it. Do you have any debts, such as mortgages, credit cards, and personal loans? Do you have family who are financially dependent on you, such as young children?
For example, if your mortgage has 20 years left then you could take out 20 years of life insurance to make absolutely sure the mortgage will be paid off even if you die.
Or if your children are still young you may want to take out life insurance for the period of time they are not yet able to financially depend on themselves.
How much financial Cover do I need?
Once you’ve decided how long you want life insurance, you will then be able to work out how much life cover you need.
Create a list of all the debts you need to pay off, such as; mortgages, credit cards, and loans. Then make a note of your dependents, like your partner and children, and how much they need in their daily life.
When you have worked out the total cost of what you need, check and see what life insurance you already have in place.
A good starting point is to check if your employer provides cover. If you pass away while working for a lot of companies, they will pay a lump sum to the person of your choice entitled to death in service. If this is not enough to cover your debt or dependents, you can then look towards adding to it with another financial package.
Remember that the longer you wait before applying for life insurance, the more expensive it will be. It is best to start thinking about it sooner, even if you don’t think you need to worry about what will happen after you are gone for years yet.
What is the cost of life insurance?
The truth is, an average cost of life insurance does not exist. The cost of daily life for you and your children will not necessarily be the same for someone else.
Some of the main factors that will influence the cost of your life insurance are:
– Age– The older you get, the more expensive your premiums will be. This is why it is best to start considering life insurance sooner rather than later, even if you don’t have to worry about your death for a while yet.
– Health– Your medical history will also be taken into account. If you have always been in good health then it is likely you will have a longer life expectancy so you will not need to pay as much money. This means that if you are a non-smoker, your premiums will be lower as well.
– Occupation– If you work behind a desk, it is very likely the premiums (the amount of money you pay) will be cheaper than if you work as a firefighter, for example.
The cost of life insurance has changed over the years, so if you took out a policy several years ago it is worth taking another look at what is out there. Premiums are generally lower than they once were.
Premiums were once cheaper for women, as they have a longer life expectancy than men. However, in 2012 legislation in Europe ensured that life insurance companies can’t use gender to determine the cost of premiums so this is no longer the case.
What is guaranteed and reviewable premiums?
When taking out life insurance, you will be offered a choice between guaranteed or reviewable premiums.
With guaranteed premiums, the cost of your payout will be the same throughout unless you change the policy in some way. This is the more expensive option, however, it could save you money in the long run as the cost cannot rise over time.
Reviewable premiums can start out less expensive, however, they have the potential to rise over time. This could happen in response to wider economic trends or an increase in risk when it comes to your life expectancy.
Should I take out joint or single life cover?
If you’re married or in a long-term relationship, you might be considering whether to take out a joint life insurance policy.
There are a few things to be aware of before committing to a joint policy.
Firstly, a joint policy is not much cheaper than two single life policies.
Secondly, once the first person in a joint policy has passed away and the lump sum is paid out, the second person will be left without insurance and so must take out another life insurance policy if they want to be covered again. By the time this happens, they may be much older than they were the first time they took out life insurance and as we said earlier, this will increase the cost.
It is therefore recommended to buy two single life insurance policies, even if it seems like you can save money with a joint policy.
Family Income Benefit
Basic term insurance pays out one single payment when you pass away. It is up to your family members or beneficiaries to decide how to spend it as they wish. This can be convenient but it also burdens them with decision-making on what to do with the money once the debts have been paid off.
Family Income Benefit instead pays out a regular monthly income after the event of your death. It is tax-free and will pay until the end of the term agreed by you. Just how Increasing Term Insurance takes into account the rising cost of living, so can Family Income Benefit if you choose and the regular payments can increase as the years go on.
The drawback to this is that once your term finishes, the income will stop. So if you die at the beginning of a term of 20 years, then the income will continue to be paid out for twenty years. However, if you die 17 years into the term then your family will only be paid for three more years.
With term life insurance, your loved ones will only get a lump sum if you die within the agreed term. However, some people require a payout to be triggered no matter when you pass away. For this permanent life insurance, you will want to pick whole-of-life insurance or “life assurance.”
This is more expensive than term insurance or family income benefit as, at some point, a payout will definitely go out to your loved ones. There is no end to the term so you will pay money into the policy until you pass away.
This is why, if you pick this option, it is important to make sure you can pay your premiums well into your retirement as the cover will be canceled when you stop. Some policies will only ask you to pay in until you reach a certain age, such as 90 years.
Also unlike the previous types of insurance, the way your money is paid (premiums) is a bit more complicated. Some of the premiums go into investment funds and some go into life cover. This is because the whole-of-life cover is not meant to cover a sudden and unexpected death but is more used for long-term financial planning.
You can convert some term insurance policies into whole-of-life cover. This is known as convertible term insurance.
Over-50s life insurance
If you are aged between 50 and 80, you can take out over-50s life insurance. This type of insurance is suitable for people who do not want to go through a medical check. Anyone will be accepted, even if you have had previous medical problems or are currently unwell.
As with whole-of-life cover, there is no end date for over-50s life insurance. This means there is certain to be a payout when you die. The money you pay in, the premiums, are usually inexpensive but this means that the money that will come back will also be quite small. A lot of people use this policy just for their funeral expenses.
As with whole-of-life cover, some policies will only ask you to pay until you reach a certain age, such as 90 years. It is important you pay your premiums until told otherwise or no money will be paid out once you have passed away.
Here are some of the most common optional extras that you can have when you take out life insurance coverage.
Critical illness cover
Life insurance pays out money to your loved ones when you die but you can also add a policy where you get a lump sum if you are diagnosed with a serious illness or disability. These include illnesses like cancer, heart attack, stroke, or if you get into an accident that affects your daily life.
This policy is called critical illness cover and it is a tax-free lump sum. The money you receive will go to you and you can spend it on whatever you like such as everyday expenses, your mortgage, or medical treatment.
Putting your life insurance in trust
Some people choose to put their plan in trust mainly for two reasons:
– To increase the speed of the pay-out for their loved ones
– To legally sidestep the inheritance tax
The government’s current inheritance tax levies 40% on anything more than £325,000 for single people and £650,000 for married couples or civil partners. If your estate amounts to more than these figures it will be liable for the inheritance tax (IHT). The pay-out when you die is also included in this and might be what pushes your estate over the threshold.
If this is the case, then you might want to take steps to make sure the pay-out that goes out when you die goes “in trust.” This means the payout will not be added to your estate for tax purposes. Your loved ones will receive the money faster and you will be able to legally sidestep the inheritance tax.