People insure their homes. They insure their most valuable possessions and car insurance is a legal requirement. But how many people insure their lives?
A survey in January 2021 involving 2,000 adults found many were put off by persistent ‘myths’ that cover was too expensive and that insurers ‘never pay out’, while Canada Life revealed data suggesting that at an estimated 63% of adults in the UK did not have a policy and were therefore unprotected.
This article explains the main features of life insurance, how it can help to provide financial security, peace of mind and help to pay for day-to-day expenses.
There are many situations where life insurance could be helpful, for example:
- To cover a mortgage or other loans and dependants’ ongoing financial needs
- To pay an inheritance tax bill
- To pay out a series of regular amounts, say to fund a child’s education or childcare costs
Forms of life insurance
Term insurance pays out a fixed lump sum amount if the insured person dies during the term. However, if the person lives beyond the period of the term no cash payment will be made.
Other types of term cover include:
Increasing term insurance,: which contains an element of inflation proofing.
Decreasing term insurance: where the cover reduces over time (useful for paying a mortgage that declines).
Renewable term insurance: a way of extending cover at the end of the term without having to take out a new policy.
Convertible term insurance: allows the policyholder to convert to a new policy for a longer term.
A variation on term insurance is family income benefit, where rather than a lump sum, money is paid out as a regular income stream.
Whole of life Insurance (also called life assurance)
Unlike term insurance, which covers you for a specific period of time, when you take out whole of life insurance you are guaranteed a payout no matter how long you live.
Whole of life insurance can include an element of investment, with part of the premiums put into an investment fund which can accrue a ‘cash value’, some of which you may be able to withdraw tax-free. Depending on the performance of the fund, the value of the lump sum could increase, or the premiums could rise if the fund does poorly.
Generally, because a payout is guaranteed at some stage, whole of life insurance premiums are higher than those for term insurance.
Written in trust
When written in trust, whole of life insurance can be a useful way to pay an outstanding Inheritance Tax liability on your estate.
Writing a life insurance policy in trust means that the policy won’t be included in your estate for inheritance tax purposes but is passed straight to the beneficiaries. And as the money will not have to go through the probate process, it’s likely the beneficiaries will receive the money quicker.
Single versus Joint life policies
If you take out a joint policy, the money will go to the surviving policyholder, typically a spouse or partner.
Both the insured must be insured for the same amount, so the money received is the same whoever dies.
Joint life cover usually only pays out on the first death, although a small number of policies provide cover on ‘a second death’ basis, with the beneficiaries receiving the money after the last surviving person on the policy dies.
Critical illness cover can be added to a life insurance policy. Under this type of arrangement, not only do you receive a payout if you’re diagnosed with a condition listed on your policy, but if you die during the term, the nominated beneficiaries will receive a lump sum.
If you are in work, check with your employer as you may already have some cover as part of your employment package. If this is the case, you may decide to top up this cover by taking out a policy.
It’s difficult to generalise as premiums depend on individual circumstances. Shopping around can cut premiums.
As you might expect, premiums rise with age, poor health and poor lifestyles as insurers regard these as increasing their risk.
Areas requiring protection change as people go through life, with events such as buying a home, getting married, having children, or leaving a job where life insurance is included, often triggering people to purchase life cover. The amount of cover required is also likely to change, so it’s a good idea to regularly review your existing life insurance and how it fits in with achieving your financial and life objectives. A financial adviser will be able to help you with this.
In supporting clients with their financial goals, Courtiers Advisers are free to take a ‘whole of market’ approach, meaning they can search the entire market to find the most appropriate cover to meet any specific needs.