Life Insurance Guide

Coming to terms with the loss of a loved one is never an easy thing to do and adding financial burden to the grief can make coping increasingly difficult. It can help to support your family after you die, or even a business partner.
Among the reasons to take out life insurance could include:

  • Mortgage repayments – do you wish to arrange for your mortgage to be paid off?
  • Replacing the primary earner’s salary – ensuring the family does not fall on hard times after your death.
  • Replacing childcare – the death of the primary childcare provider could lead to the need for childcare expenses.
  • Education expenses – cover for school/university fees after the death of the primary earner.

 Whether it’s about leaving your debts behind or ensuring your family can maintain the standard of living to which they were accustomed, it’s clear there are plenty of reasons to look for the best life insurance policy for your personal circumstances. Getting the best quote is an important part of finding the right policy.

Different types of life cover

Life insurance (also known as ‘life assurance’ or ‘term assurance’) is a policy that pays out a lump sum in the event of the policyholder’s death, with the purpose of protecting loved ones and dependents against financial hardship.

Life insurance is usually available on a single or joint life basis with benefits including paying out on the diagnosis of a terminal illness. If the policyholder is alive when the policy expires no payment is made and, should the policyholder stops paying premiums at any stage, the policy has no value.

There are several types of life insurance:

  • Level term insurance – designed to pay out a sum of money if the policyholder should die during the policy’s term. The sum assured is guaranteed and remains unchanged throughout the term.
  • Decreasing term life insurance i.e. mortgage protection cover – where the sum decreases during the policy. It is regularly used to protect capital and interest repayments on a mortgage.
  • Renewable term insurance – On the expiry date there is an option to continue without a health review.
  • Convertible term insurance – Level term insurance with the option to revert to whole life or endowment insurance.
  • Increasing term insurance – Due to inflation the value of money declines each year. Consequently, this form of insurance combats that with an escalating sum assured.
  • Index linked term insurance – Some insurers provide the option for the premium to be increased each year in relation to the Retail Price Index.

Life insurance premiums

Life insurance policyholders pay premiums into a fund from which all claims are paid out. There are two types of premium available – the guaranteed and reviewable policies:

  • Guaranteed Premiums – The life insurance company guarantees to never increase your policy premium.
  • Reviewable Premiums – You agree that the company can review your policy at set intervals.

 Initially the reviewable premiums will work out cheaper. However, over time these premiums are likely to be increased and therefore the overall cost will surpass that of the guaranteed premium. So generally, guaranteed premiums will work out as a better buy in the long run, but if you are on a tight budget the reviewable premium presents a better short-term option.

Saving money

Here are some important elements to look out for to help you save money:

  • ‘Written in Trust’ – If your policy is written in trust then in the event of a claim this means that the money goes directly to the person you nominate. It also avoids your estate paying inheritance tax which could mean a 40% tax saving.
  • Joint life insurance – This is normally written on a first death basis, meaning the policy pays out on the death of the first policyholder. It will save money but bear in mind that it will leave the second policyholder to potentially try and get a new life insurance policy at an affordable premium in old age. Overall it will work out to be more expensive in those circumstances.
  • Critical illness – A life insurance policy with critical illness cover will work out much cheaper than two separate policies. Also remember to differentiate between critical illness and terminal illness cover. Most policies will automatically include terminal illness cover but the critical illness policy will pay out the lump sum for a range of illnesses with no life expectancy criteria.