Life Insurance
Level Term Life Assurance
A level term life insurance policy pays out to your dependents if you die, there are two keys words:
- Term: This means you only get a payout if you die within a fixed term e.g. 20 years.
- Level: This means because the payout you get doesn't vary, it's always at a set, level amount.
Therefore, level term assurance guarantees a lump sum payout or 'Death Benefit' upon death within a fixed time, the 'Term'.
For example...
A Level Term Assurance plan with a death benefit of £200,000 and a term of 20 years...
...would pay out £200,000 if you were to die within the next 20 years. If you lived beyond the term it would not pay anything out.
Mortgage Term Assurance
This is bought to pay off your repayment mortgage in case you were to die. It's also sometimes called 'Decreasing Term Assurance' as the amount it pays out decreases over time, as your mortgage does.
For example...
If you took out a mortgage of £250,000 over 25 years, you might only owe £180,000 in 10 years time...
...The payout from a Decreasing Term Assurance plan would decrease in line with this, ensuring your mortgage is always paid off if you were to die within the term.
Because the insurance company's risk is reducing all the time, the premium you pay for the cover is less.
Family Income Benefit Assurance
Family income benefit pays a monthly income if you were to die within the term. You choose the amount of income you want at the start of the plan. If a claim is successful, the monthly income will continue at the level specified until the end of the policy's term. These payments can either be index linked or level.
Family Income Benefit insurance is primarily used to ensure that a family's income is maintained at an acceptable level if the main income provider were to die. It usually has a term to when your dependents are no longer financially independent on your income...when they leave school or university.
Combined Cover
It is often appropriate to have a combination of these types of cover. This ensures all your protection needs are met whilst keeping the cost to a minimum.
By selecting combined cover from one insurance company it can help to keep the cost down as they are likely to offer you favourable terms for your commitment.
Additional Factors
Couples can apply for either separate individual policies or a joint policy which would usually pay out on the 1st death (although it is possible to do this on the 2nd death when required for tax planning reasons).
• Writing Policies in trust
If you die the life insurance payouts form part of your estate which could mean it is hit with Inheritance Tax. In many cases it's possible to avoid this by writing the policy in trust, as long as this is done at the time the policy is taken out.
Writing your plan in trust means it will go directly to your dependents, so it doesn't go through probate, avoiding unnecessary solicitor's cost and speeding up the payout.
• Joint Life Policies
Joint policies are only suitable if you need the same amount of insurance for the same term for both partners e.g. a joint mortgage
• Critical Illness
Critical illness policies pay out a lump sum if you get a specific illness as defined by the terms of the policy. The payout can enable you to arrange your families' future finances while you still are able.
It is often simply a case of adding critical illness to any of the above policies.
• Reviewing Existing Cover
Your circumstances are likely to change in the future; furthermore they are likely to be different now than they were in the past. Lifestyle changes such as marriage, having children, taking out a mortgage or a promotion at work are examples and are likely to affect your need for cover.
• Replacing Existing Cover
Your circumstances are likely to change in the future; furthermore they are likely to be different now than they were in the past. Lifestyle changes such as marriage, having children, taking out a mortgage or a promotion at work are examples and are likely to affect your need for cover.
If you've an existing policy you bought in the past, there may be significant savings in replacing it. The cost of life insurance has decreased dramatically in recent years as our life expectancy has increased. That, coupled with the savings the product providers have been able to pass on due to their online capabilities, makes reviewing your existing polices a worthwhile exercise.
However, if you've experienced health problems in the past it may not be beneficial to replace your existing policies. In some instances you may find that the cost of new cover is significantly higher or worse, declined. It is important that you don't cancel existing arrangements before getting a decision on any new applications.
Another factor affecting the cost of new cover was the Gender Directive, which came into force in December 2012; it increased the cost of insurance for all females and most males.
