Life Insurance

by Ben
Lifebelt, Lifeguard, Life Ring

Confused about which Life Insurance policy is right for you? Read our Tips



  • Thoroughly research or get an independent financial advisor to help you choose which insurance policy is best for you.
  • Check your documents to see if you already have any life insurance cover, through your mortgage or your work.
  • Life insurance is cheaper the healthier and younger you are – therefore don’t put off sorting it out.
  • In the case of couples, often two separate policies are a better deal that a joint one.
  • Ensure that you shop around for the best deal – prices vary hugely.
  • Check that the company you decide on is regulated by the FSA.
  • Before making your final decision to purchase, ensure that your premiums are fixed throughout the term.
  • If you do not declare any existing medical conditions this could make your policy invalid if your relatives need to make a claim.  So, be honest.
  • Write your policy ‘in trust’ for quicker payouts and to reduce the risk of your relatives having to pay inheritance tax.
  • Write a will – that way you can be sure that your money is going to go exactly where you want it to.
  • Although many of us are keen to put off buying life insurance, especially as it can make us think of our own mortality.  If you have someone who is financially dependent on you, it is a must.

 

Policy Types

For most people, the choice to purchase life insurance is based upon two main reasons: the first being paying off large debts like a the mortgage and the second being family protection, i.e. leaving behind money for your family to live on if something happens to you.

Depending on your specific needs different policies offer different types of cover, this is why is essential to research what is available.

The most basic type of life insurance is called term insurance.  This requires that you choose the amount you want to be insured for and the period for which you want to be covered.  Therefore, if you die within the term, the policy pays out – if you don’t, it doesn’t.

The other option is decreasing-term insurance, for most people a combination of both is the best option.

Level-term policies

What exactly is it?

If you die within a specified term the policy will pay out a lump sum of money.  The amount that you are covered for stays the same throughout the term.

Who does it suit?

This type of policy is a good option for those who want to insure that their family is protected in the event of death.  With this policy you can leave a lump sum of money that your family can invest and live on after you have gone.  If you need a specific amount of cover for a certain amount of time, this is also a good option.

What should I consider?

This is a simple way of ensuring that in the event of your death you have one policy large enough to provide your family with the cover they need, and pay off debts like your mortgage.

However, in many cases it can be a better option to separate your life insurance cover so that you know exactly which policies you have and what they are for.  While level term is generally a good choice for interest-only mortgages (the amount you owe stays the same throughout the term), decreasing term policies can often be a cheaper and better choice for repayment mortgages.

Decreasing-term policies

What exactly is it?

With a decreasing-term policy the amount that you are covered for decreases over the term of the policy.

Who does it suit?

These policies are created with repayment mortgages in mind, this is due to the fact that the amount you owe, with this type of mortgage, decreases each year as well.

Decreasing-term policies are usually around a third cheaper than long-term cover premiums.  Often these policies are referred to as mortgage protection cover as they are so regularly used as protection on repayment mortgages.

Family income benefit

Another variety of decreasing-term policy is family income benefit.  The key difference is that, instead of a lump sum, it pays out an income.  This makes it a good option for family protection, particularly if your dependents would prefer to receive a set income each year, rather than managing a large lump sum.

The benefit of family income benefit is that it is easier to work out how much you need, based on your salary (i.e. if you take home £3,000 per month) you could arrange for the same amount of money to paid out to your family on a monthly basis in the event of your death.

There is, however, a catch.  If you die two years into a 20 year family income benefit policy, your family could receive £3,000 a month for 18 years, however, if you die a year before the end of your policy, your family would only receive £3,000 a month for one year.

Although the cost of Family income benefit is around the same as level-term insurance – the cover it provides is worse value for money.

 

 

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