Life insurance is very important, especially as we get older. Having a policy in place can help to make sure that your loved ones are protected financially once you're no longer around. Should the worst happen, having a policy in place is one of the cheapest ways to protect your family's future.
Life insurance can be complicated though, and it's easy to overpay for your policy. Today's post explains everything that you need to know to have the best possible policy for you and your family.
What is Life Insurance?
Life insurance is a policy that will pay out a sum of money to your loved ones, either after you've died or after a set period. It has been created to help your family financially when they can no longer rely on your salary or income.
The money from the policy can be used to clear debts, pay the mortgage off, or for everyday use. It can also be used towards your funeral.
Who needs it?
If you have a partner or family who may struggle financially without you then life insurance is essential. If you're living in a family home with a mortgage that you pay, a policy will be able to provide for them if you die.
Life insurance isn't as important if your single and have nobody depending on you. If your partner earns enough money for your family to live on, it may also be necessary. However, always keep in that a policy can be used to help fund your funeral.
There are several different life insurance policies out there. Examples include:
A set amount of tax-free money is paid out when you die during the fixed term agreed in the policy. This cover guarantees a lump sum payout to your dependents if you die within a fixed time. For example, your dependent receives £250,000 if you die within the next 20 years. The more cover you get, the more this policy will cost.
This type of life insurance only pays out on death and will only pay the agreed fixed amount. When working out how long you want the term to last, you need to be thinking about what you what any payout for.
For example, you may want the term to last as long as your mortgage repayments do or for as long as your children are in education.
You can choose to have a single policy or a joint couples policy. It may be marginally cheaper to have a joint policy if you're both getting life cover, however it will only pay out once, usually on the first death. With two single policies you'll receive two payouts and if you happen to split from your partner, you won't need to buy a new policy.
You will also be given two choices for the monthly insurance payments; either guaranteed or reviewable. A guaranteed premium means that your insurer will never change the price and you'll know exactly how much you'll be paying throughout the policy.
Reviewable premiums will cost less at first, but the insurer can hike the prices up at a later date. For this reason, we advise going for the guaranteed premium.
Whole of Life
This policy provides your dependents with a payout no matter when you die. According to Money Saving Expert, this type of policy is often investment-linked and is used to mitigate inheritance tax. In other words:
The pay out amount should cover the inheritance tax bill on death, and the policy runs out when you die, instead of after a fixed time.
Mortgage Decreasing Term Insurance
This type of cover pays out to cover your mortgage if you die within a set term. As the mortgage debt decreases over time, the amount the policy will pay out also decreases. In terms of a mortgage payment, this policy will work out cheaper than the level term life policy.
Life Insurance Investment
These are investments operated through life insurers. While there is a life insurance element they're often things like endowments or with-profit policies and are used far more often in the 'investment' zone rather than for protection if someone dies.
What Isn't Covered?
Life insurance commonly only covers death. Having a long-term medical condition or a disability, which leads to you being unable to provide for your family, are not covered. Some policies may provide a terminal benefit that pays out on diagnosis of a terminal illness, however this isn't automatically granted, and you will need to read through your policy to see if this is included.
Many policies will some exclusions, such as:
- Not paying out if you die due to drug or alcohol abuse.
- Extreme sports. You may need to pay extra in order to be covered when you take part in such a sport.
- Any cause of death related to a serious health problem when you take out the policy.
How much should I cover?
Most professionals suggest that you cover 10 times the annual income of the highest earner, or the most that you can currently afford. Remember, your policy needs to be able to cover:
- Future spending - such as university fees for your children.
- Immediate outgoings that your dependents would need to pay.
- Any outstanding debts that need to be paid off.
- Additional expenses that death may trigger.
Although 10 times the annual income may seem high, inflation will mean the value of this payout will be less in 10 years' time than it is right now and you're getting cover to last you that long.
The Money Advice Service suggests following these steps when working out how much coverage you need:
- Add up your debts, such as your total mortgage and credit card debts. Then add up the expenses that you want the insurance to cover, such as your basic monthly outgoings, education fees, and other costs.
- Check what kind of cover you already have. For example, if you're employed your benefits package might include a death in service payout. This is a lump sum that's a multiple of your annual salary at death.
- Calculate the cover you need. When you have these two figures, take away the benefits or cover you already have from the total amount your dependents need. The result is the amount of life insurance cover that you should take out.
- Think about the length of time you want the policy to last.
How much does Life Insurance cost?
There are several different factors that have an effect on the cost of your life insurance policy, including:
- The length of the policy.
- The amount of money you want to cover.
The younger you are and the less likely you are to die from a medical condition, the cheaper your insurance is going to be. The cost of your policy will increase the older you are, if you smoke and if you have a risky job. When applying for a policy you need to ensure that you declare everything, including any past conditions or future risks.
One way of cutting the cost of your life insurance is to quit smoking. Non-smokers pay less for their policies because they're less likely to die during the term of the insurance. To count as a non-smoker, you need to have been genuinely nicotine-free for at least a year and in some cases longer, so always check.
Write your Policy in Trust
According to Money Saving Expert, if you write your policy in trust at the time the policy is taken out you can avoid the money being claimed by the taxman. Usually, when you die the insurance forms a part of your estate and could therefore be hit with inheritance tax.
If you write in trust the insurance pays out directly to your dependents, so it never becomes part of your estate, which avoids inheritance tax and speeds up the payout.
Commonly, when you get most insurance policies they include the option (and papers) for writing in trust directly at no extra charge. If you understand what you are doing, you can write the policy in trust yourself but if not, we suggest acquiring advice from an advisory broker.
To find out more about insurance specifically for older people, check out this guest blog from Shepherds Friendly.
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