Guide To Life Insurance
Dying may not be a happy thought, but life insurance is one of the least expensive ways to protect your partner and children. There are a few alternatives and a few things to be conscious of. So, the objective of this guide is to give you the best and quickest way through deciding whether you need life insurance and how best to choose and buy one or more policies.
What is life insurance?
It is an insurance policy which pays out if you die. Life insurance is normally used to provide money to dependents to avoid making what is already a bad time a lot worse.
There is of course no legal requirement to have life insurance. But if anyone depends on income which would be lost if you die, you should have it. If you don’t have any dependents, or if your family can pay any mortgage and household and other bills for example school fees or medical bills from other income or savings, then you don’t strictly need life insurance. Incidentally, you also shouldn’t rely on employer ‘death-in-service’ life insurance as it tends to be blunt and more limited than a policy you would choose yourself.
The most popular life insurance is ‘Level Term’ insurance which is where you define how much you need the insurance to pay and the term of years the policy will cover: for example, £100,000 for 20 years. The higher the cover and the longer the term the more the insurance costs. You pay a monthly premium until the policy pays out (you die) or the term ends.
The main alternative life insurance types are:
- ‘Decreasing Term’ designed to cover a mortgage and therefore reducing in line with the mortgage balance;
- ‘Family Income Benefit’ which pays an annual tax-free payment for the remaining term of the insurance;
- ‘Over 50s’ which has guaranteed acceptance without medical and is therefore more expensive form of life insurance; and
- ‘Whole life’ which is often used to mitigate inheritance tax but is expensive.
You could of course choose to combine different types of life insurance depending on your specific requirements.
Normally, a payout from a life insurance policy will be part of your estate and subject to inheritance tax. However, it is possible to write the policy in trust at the time the policy is taken out at no extra charge. The insurance would then pay dependents directly so it never part of your estate with the additional benefit of speeding up the receipt of the money. The main potential downside is being unable to change or cancel the trust.
Insurance companies work out the likelihood of having to pay out (the likelihood of you dying). Because the probability of dying increases with age, so premiums increase even if the remaining term is shorter.
Reviewable premiums can start cheaper but you can’t fix how much they will cost in the future. Guaranteed premiums are fixed from the start over the life of the policy.
A joint policy is less expensive because it only pays out when the first person dies, which is logical if the surviving partner is the only dependent. Otherwise, separate policies are better. Incidentally, if you split with your partner and need a new single policy this will also be more expensive as you will be older than when you took the joint policy.
What life insurance cover do I need?
You can estimate how much your dependents will need (including inflation) balanced against how much you can afford. But a good approximation is 10 times the income being replaced including any income lost by surviving dependents if they have to change employment. You might also want to estimate future expenditure like university costs (and future children during the insurance term). Ideally the term should match the lost income. So, the policy needs to cover children (and future children) at least until they finish full-time education and partners though to pension.
Critical illness cover is a common add-on to life insurance or can be a separate policy. However, ‘critical illness’ can be narrowly defined (and payout refused), and it may be better looking at a separate income protection policy.
It is possible to save money by changing life insurance, and there is nothing to lose getting a quote. You can cancel an existing policy. But as life insurance gets more expensive with age a new policy isn’t guaranteed to be cheaper. It depends how competitively you were quoted originally (did you just get the policy from your bank?), and whether new factors come into play like quitting smoking or stopping a risky job. Incidentally, if you have given up smoking you should ask your doctor to note this in your records to support any claim.
Can an insurer refuse to pay if I forget to disclose pre-existing medical conditions?
Yes. Insurance companies work out the likelihood of having to pay out (the likelihood of you dying), and that depends upon your age, occupation, medical history, and lifestyle. Therefore, giving incorrect information, whether on purpose or not, could invalidate the policy and mean the insurer refuses to pay out. It is better to volunteer information and in the case of specific medical conditions to seek advice on which insurers cover which conditions.
If you prefer to avoid discussing your health, there are ‘Over 50’ policies with guaranteed acceptance. They are obviously significantly more expensive, and for example may not cover deaths in the first year or two of the policy.
Especially if you are looking at standard ‘Level Term’ life insurance cheaper is better so long as the insurer is reputable. Insurance through a bank or direct with an insurer is likely to be more expensive. Unlike household or car insurance, the cheapest prices are not on comparison sites but through brokers, and a broker can navigate through the types of life insurance which should also save money. You can use the the British Insurance Brokers Association website
to find a broker or buy through a discount broker if you know what you want. In return for a fee of around £25 you can save you £1,000s over the life of a policy compared with buying from a bank or direct from an insurer.
If you have a problem with your insurer, you should always call them first. Common problems include delayed or refused payments and surprise charges. If the insurer can’t or won’t sort out or at least explain the problem, then you can complain to the Financial Ombudsman Service
, or use a tool like Resolver
Incidentally, if your insurance company goes out of business, the Financial Services Compensation or FSCS will try to find another insurer to take over your policy as well as ensure any ongoing claims are sorted out.
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