Guide to life insurance
Life insurance is not compulsory, but anyone taking out a mortgage is strongly advised to take out this cover. Knowing that your family would be able to live in an unmortgaged home in the event of your untimely demise brings great peace of mind. and even if you do not have a family it is worth taking out life cover to ensure your parents would not be saddled with a large debt should the worst happen. there are many different types of life cover, some more complex than others, so it makes sense to speak to an independent financial adviser to find the right cover for your circumstances.
Remember too that you are actually far more likely to fall ill than to die prematurely, so it can be worth speaking to an adviser about Critical Illness insurance too.
There are different types of life insurance:
Level term assurance
This is the most basic type of life insurance. In return for relatively low monthly payments, the policy guarantees an agreed amount of life cover (also known as the sum assured) over a fixed term – often the mortgage period. It is commonly used to cover interest-only mortgages, where the capital owed remains constant throughout the mortgage term. The lump sum is paid out if death occurs before the policy ends. Term assurance has no surrender value after the policy has ended.
Decreasing term assurance
With decreasing term assurance, instead of the life cover staying at the same level it reduces over the life of the policy and only pays out if death occurs before the policy ends. This type of cover is popular among those taking out repayment mortgages, as the sum assured reduces roughly in line with the amount of capital owed on the mortgage through time. So if death should occur before the period ends, the policy pays out a proportion of the sum originally assured, which should be enough to pay off the amount of capital still owed to the lender.
Convertible term assurance
Term insurance can be converted into permanent cover after the original policy comes to an end, usually by buying whole-of-life insurance or an endowment policy. You cannot be refused the right to take out the new policy regardless of the state of your health. But there are a number of rules.
- You can’t increase the sum assured when you convert
- You must convert before your term assurance ends
- The new premiums will be determined by your age and sex so they will be more expensive.
Increasing term assurance
The sum assured increases during the policy’s life, usually by five per cent to 10 per cent a year. The sum assured usually runs out when you reach 65.
Six things about buying life insurance
- Shop around Always shop around and be careful not to trust your bank or any other tied source to provide the best advice. High street mortgage lenders are often tied to one provider and can be very expensive. Make sure to either contact a range of companies or speak to an independent specialist who can search the market for you as no one insurance company can ever be competitive for everyone.
- Get the right type of policy This sounds obvious, however, there are dozens of different types of life cover plans available. Known as ‘Term Assurance’, the most common form of life cover pays out should you pass away during a specific time period. However cover can be level, increasing or even decreasing to suit a mortgage. Cover can also be paid as an income or a lump sum, and a range of options will be offered including critical illness, waiver of premium, conversion, renewal and so forth.
- How much cover? 10 x your salary? 15 x your salary? £100,000 per child? Double the mortgage? We don’t believe that any set formula works for every individual. It makes sense to firstly work out how much you would need to cover all your debts (mortgage, loans and credit cards) on a lump sum basis and to then consider dependants and earnings.
- Always consider single life insurance policies Traditionally joint life cover was far cheaper than taking one policy each. However, in recent years this has changed. Buying two single policies potentially provides double the cover, doesn’t leave a surviving partner without cover later in life and often only costs a few percent more.
- Use a trust Every £100,000 of life insurance is a potential £40,000 tax bill under current Inheritance Tax legislation. A trust is a free and simple way to ensure that the monies go to the right person quickly and, as any asset under trust is not considered part of your estate, upon death the pay out is not taxable.
- Be honest Forgetting to mention a minor health issue could result in your policy not paying out for ‘non-disclosure’ hence our advice is always to be as honest as possible. Whether it is smoking habits, a bad back or occasional pins & needles – make sure your insurance company knows about it, this way you are safe in the knowledge that your policy will pay out when you need it to.