Although we don’t like talking about it, sooner or later we are all going to die (hopefully later than sooner), and when you do, what will happen to your family when you are gone and who will look after them? One way to avoid sleepless nights worrying about this problem is to take out some form of life insurance that will provide support for them after you have ‘moved on to a higher plane’.

What exactly is Life Insurance?

Top

You insure your life over a period of time, and, if you die during the period the life insurance policy is in force, the insurance company pays out the agreed amount of money to your designated beneficiary or beneficiaries, providing you keep up with the regular payments which are usually monthly or annually.

If you don’t die during the term associated with the life insurance policy, then both you and the life insurance policy provider are very happy. You because you are alive, and the policy provider because they did not have to pay out any money. It can be seen therefore, that life insurance can be looked on as a bit of a gamble, or a way to achieve peace of mind, because if you die during the period of time the life insurance is in force, then at least your dependents will have the money to pay off any debts and an income to keep them going for awhile at least. On the other hand if you outlive the term of your life insurance policy, you or your family get precisely nothing other than the comforting thought that you are still alive.

How much cover should you insure

Top

This depends on what exactly your liabilities are now, and what they are likely to be during the term of the life insurance policy. You will need to ask yourself a few questions regarding your income, outstanding debts such as mortgage repayments, loans, credit cards etc, all of which need to be taken into account when calculating how much life insurance cover you will require. There may be other factors including funeral expenses, that you will need to add to the overall total life insurance coverage.

Another expense that may befall your family if you die early is that of educational expenses, depending on how old your children are, university or college fees need to also be included in the final total amount of life insurance cover required.

Of course there is another cost involved which is the cost of the life insurance premiums; you will need to calculate how much you can afford to pay as ultimately this is the figure that will govern the amount that the life insurance policy will pay out on your death.

Once you have come to a final figure that will keep your family fed, watered and clothed after your demise, the next step is to figure out how long you need the life insurance policy to run for. Most people insure their lives up until retirement age which in most cases will be sixty or sixty-five. After this you will have become a pensioner and most likely your children have moved on to make a life of their own and take out their own life insurance policy.

It may well be the case that life insurance is no longer a priority and your money could be put to better use such as a new greenhouse, new slippers, a world cruise, or a new Ferrari depending on your tastes.

What type of Life Insurance is best for you?

Top

Life insurance cover can be arranged for both a single or joint life (i.e. you and your partner). Joint life cover usually pays out on a first death basis, in other words the policy pays out when the first policyholder dies, single life means what it says, Life Insurance is taken out on one named person’s life. It is important to remember that it is not only the ‘wage earner” of the family who will need to have life insurance, the other partner, who looks after the children and the home should also be considered because if the wage earner were to lose his or her partner, the cost to replace (sorry to be so clinical) him or her with outside help would be very expensive in today’s climate. The remaining family will still need a cook, a cleaner, and childcare for both weekdays and the weekend.

Who are the Beneficiaries?

Top

Although the beneficiaries of most life insurance policies are either the surviving spouse or the children, this is not always the case. There are other areas where a life insurance policy is applicable. For example, if there is a situation in a business relationship that meant one or more of the partners were indispensable to the business, then it would be prudent to arrange a life insurance policy for one or more of the business partners.

A very important or key employee of a business may also require a life insurance policy so as if he or she were to die, the cost of finding a replacement would be covered by the payout from the life insurance policy.

Where a person has no dependents but still wants to leave or give a sum of money to a close friend or a person who has helped them during their life time, arranging a life insurance policy may be the answer.

It could also be the case where someone has no dependents but has a favourite charity; once again a life insurance policy may be the answer as the charity could be named as the beneficiary.

Finally the person could have a favourite pet, ‘Jack’ the goldfish, ‘Spot’ the dog, or ‘Tibby’ the cat. I say no more!

There are a number of different policies available that cater for most requirements for life insurance cover. However most insurance companies will not offer a policy for less than seven years and the usual term of the policy is from twenty to twenty-five years.

A lot of insurance companies will not offer life insurance cover after the age of sixty-five but a few will cover up until seventy years of age. However if you are coming up to retirement and need some form of life insurance, it may be better to look for another way to provide for your family as there are a number of products on the market that cater for the ‘more mature person’.

Types of Life Insurance

Top

Level Term insurance or Level life insurance
As the title suggests, this is a life insurance policy that provides cover of a guaranteed amount to be paid out if death occurs during the duration of the policy. The payments are made regularly, either monthly or annually depending on the agreement. If the policyholder dies during the agreed term, the amount that the life insurance policy covers is made payable to the nominated person named in the policy. Alternatively, if the policy comes to the end of its term and the policyholder is still alive, no payment is made.
This is probably the simplest form of life insurance and as such the premiums are usually ‘low cost’.

Decreasing Term insurance
Unlike Level Term life insurance where the amount paid out on death is guaranteed, the amount paid out from a Decreasing Term life insurance policy becomes lower over the term of the policy. This type of policy is used to protect your mortgage repayments and as the outstanding debt on your mortgage reduces over time, so indeed does the amount of cover needed to protect it.
It is often the case that mortgage providers insist on some type of life insurance that guarantees repayment if you die before the mortgage is repaid.

Increasing Term insurance
If inflation is going to create a problem for your family after you die, then you could opt for an increasing term insurance policy, which increases over the term of the policy so as to combat inflation.

Indexed Linked Term insurance
This is a life insurance policy where the sum insured increases every year in line with the Retail Price Index (RPI)

Whole of Life insurance (also known as Life Assurance)
This type of life insurance covers the policy holder for as long as he/she pays the premiums, which means that as you (and I) will inevitably die at some time or another, the life insurance policy will always pay out providing the life insurance premiums are kept up to date. There is no fixed term as such, which makes it a more expensive type of life insurance policy.

Convertible Term Insurance
This type of policy allows you to ‘convert’ or change the conditions of your Life Insurance policy at the end of the term, without submitting new medical details.
For example, your circumstances may have changed over the last twenty years and now you want whole-of-life insurance cover rather than level term cover.

Endowment life insurance
Usually coupled with a mortgage, Endowment polices are either payable on the death of the policy holder or on the day that the endowment policy matures. The premiums have to be paid from the first day the policy is issued and kept up to date until the endowment policy matures. The premiums can be made annually, monthly and in some cases a ‘one off payment’. Endowments are a way to both insure against a risk and save for future needs such as retirement, mortgage payments. They are also a form of Life Insurance as well as if the policyholder dies before the end of the term the Life Insurance policy pays out the initial sum insured plus any interest it has made during the investment. Not as popular now as they were in the nineteen sixties and early seventies, as other saving products with better returns have now replaced them.

Critical Illness
Another form of life insurance is to provide cover in case you suffer a very serious but not deadly illness for example, heart attacks, cancer, deafness, blindness, tumor, etc.

A great deal of care should be taken when choosing which type of policy is right for you as there are many critical illness policies that cater for most critical illnesses and provide cover from the basic illnesses up until specific illnesses.

It is vital that you fully understand just exactly what is covered within the critical illness insurance policy and equally what is not covered.

If you are unfortunate enough to suffer one of the illnesses covered, the critical illness policy will pay out the sum insured on a positive diagnosis. It will not cover any medical expenses associated with the treatment of your condition.
You must inform the critical illness policy provider of your full medical history both past and present as failure to do so could result in the critical illness cover being forfeited and not pay out which is the last thing you want.

Family Income Benefit
This is usually provided for a more specific purpose rather than a lump sum payout, such as education costs for you children or a salary for your family. If you die during the term, Family Income Benefit provides a number of regular payments for the remainder of the term. For example, you decide to take out Family Income Benefit for twenty-five years, and after twenty years you unfortunately die, the Family Income Benefit policy pays out a regular amount to the beneficiary for the remaining 5 years.

However if you die five months before the end of the twenty-five year period, then the policy would only pay regular payments for those five months.

How Much does Life Insurance Cost?

Top

There are many factors that will determine the cost of life insurance as the policy will contain a number of benefits, exclusions, conditions, that are applicable to the individual who is applying for life insurance cover

Life insurance companies are businesses and as such look to make a profit, so they make sure that their exposure to risk is as little as possible.

In most cases, the majority of people will have a healthy life and will live for the average life expectancy, so life insurance companies invest their earnings and make interest on their investments in the probability that they will receive more in premiums than they will pay out in claims. However there are those amongst us that are deemed by the life insurance companies to be a higher risk than others, due to a number of particular situations, and these people will be charged a higher premium depending on what exactly makes them a higher risk.

Man or woman
Now without appearing to be sexist, it is a known fact that women usually live longer than men, so in the eyes of the Life insurance provider a woman is likely to be a slightly better ‘bet’ than a man when it comes to providing life insurance.

Age
The saying ‘you are only as old as you feel’ does not seem to apply to Life insurance providers. The majority of life insurance policy providers will not provide cover for anyone over the age of seventy-five, so if you really want to insure your life over the age of seventy-five then you must look to take out the policy early.

The price of the premiums are dependent on your age, so the sooner you take out your life insurance policy the lower your life insurance premiums will be.

Bad Medical History
If you suffer from an existing medical condition, you are considered a greater risk and therefore asked to pay a higher premium for your life insurance cover.

Examples of this are high blood pressure, high cholesterol, cancer, overweight and obesity, heart problems, and a history of illness within the family.

Smoking
Not only is smoking bad for your health, it is also bad for your wallet or purse.

Life insurance companies do not look kindly towards smokers now that there is a proven link between smoking and cancer and another between smoking and heart disease. It is most likely that the risk of a smoker dying earlier than a non smoker is greater and therefore life insurance companies charge a smoker a higher premium for life insurance cover than a non smoker. Every Life insurance policy provider has their own way of calculating just exactly what additional cost is added to the premiums for someone who smokes.

High Risk Occupations
Your might say that all of us have a high risk occupation one way or another, and that may be true, but Life Insurance companies look on it in a different way.

Now I know we all want to be fighter pilots, lion tamers, deep sea divers, etc. but some of us have a more mundane occupation for acquiring our hard earned cash.

That is not to say we don’t all work hard, just that some of us have a riskier job (in the life threatening way) than others. The Life Insurance policy provider will have some form of chart or list that will work out how much of a risk you are to them in regards to providing life cover. It is very important that you tell your intended Life Insurance Policy provider of any additional risk on your life that your form of employment constitutes, as failure to do so may invalidate any future claim.

Sports and Hobbies
The way we relax and enjoy our leisure time will also have a bearing on how much you pay for your life insurance premiums. Bungee Jumping, Mountain Climbing, Pot Holing and other such activities are not looked upon kindly by Life Insurance Providers, whereas knitting and stamp collecting are. However, as with all improbabilities in life, you could fatally injure yourself with a knitting needle! Or a large stamp album could fall on your head! Anyway it is well to be aware that whatever your favourite sport or pastime is, it will have some cost implication on your life insurance premiums.

As always it is very important that you tell your intended Life Insurance Policy provider of any sport or hobby you participate in that may increase the risk on your life, as failure to do so may invalidate any future claim.

Taxation Issues
Any payout made by enforcing a Life Insurance policy is tax free, however this may not be the end of it as the payout could be classed as part of your estate and as such would be liable to Inheritance Tax at a rate of 40% and you don’t want that.

The best way to avoid this unfortunate occurrence from happening is to set up a trust where you can put your Life insurance policy. It is usually part of the services offered by the Life insurance provider of Life insurance broker to arrange a trust on your behalf, and some do not even charge a fee (those are the one’s you want to find).

Another benefit of a trust is that you can control to some extent how the money is spent after your death, for example speed up payment to certain outstanding bills.

However if the life insurance policy is assigned to your mortgage provider and is to be used to pay off the mortgage, you cannot assign your life insurance policy to a trust.

If in doubt, ask your Life Insurance Policy provider what are the implications associated with placing your life insurance policy in a trust.

In Conclusion

Top

If you have read your way through to this point, then I congratulate you on your perseverance and I hope I have given you a little more understanding of Life Insurance.

However, as always, if your are intending taking out a Life Insurance policy, please get in touch with Independent Financial Advisor (IFA) who can advise on the best policy for your individual requirements.

I sincerely hope that you don’t have to cash in your life insurance policy just yet and in the words of Mr. Spock “Live long and prosper”.

Email to a friend