Life Insurance

What does Life Insurance cover?

In simple terms, anyone with financial dependents should consider life cover. But there are a number of milestones in life that often prompt people to get a life insurance plan set up.

For example:

• When you get married, you’ll want to think about getting cover in place to protect your spouse.
• When you get a mortgage you’ll usually be asked to get cover to pay off the debt if something happens to you.
• When you have children, you’ll want to make sure that there’s enough cash to cover the cost of raising a them until they can stand on their own two feet. In the UK, it costs around £236,000 to raise a child to 21 years of age.
• If your children are in private education or planning to go to University, you’ll want cover to see them through.
• If you’re the sole earner in the family, you’ll want to make sure your income is replaced if you die.
• If you’re in a dual-earning household, you’ll want to know that your family could survive on just one income – life insurance can help bridge the gap.
• If you’re starting or running a business, there are often more cost-effective ways of paying for life cover.

When you speak with a protection adviser, you’ll quickly understand whether life insurance is right for you - or if a different type of life insurance policy is more appropriate.

How Much Does Life Insurance Cost?

Incredibly, most people think life insurance is 397% more expensive than it actually is! (According to research published by SunLife, a major global insurer).

Truth is, ordinary term life cover is one of the cheapest protection plans you'll get. It's also one of the most valuable because it gives the people you love freedom to grieve - without the added pressure of financial uncertainty.

Compare the investment you make to the size of the payout, and you'll see that Life Cover is also incredible value for money.

Here's four things to know about how the outlay is calculated...

• Outlay is based on your age and state of health on the day you take the policy.
• The insurer will also consider your BMI, how much you drink, and whether or not you smoke.
• Some insurers will charge more if you have a high-risk occupation or hobby.
• The monthly outlay for similar plans will vary from insurer to insurer.

But the real beauty of life insurance is that as soon as you get a policy, the monthly outlay is usually fixed for life (you might choose a ‘variable’ option, which is reviewed regularly and can rise over time, but this option is rarely recommended).

This means that as you age or begin to suffer health problems, your outlay won’t change.

So the sooner you get life cover, the more you'll save.

What Types of Life Insurance Can I Get?

As well as the most popular ‘level-term’ life cover, there are a couple of other variants available:

Decreasing Term Life Cover – this is similar to ordinary 'level-term' life insurance, but in this case the lump-sum your family gets will go down the further into the term you are when you die. So if you get a twenty-year plan, but die after ten years, your dependents would only get half the pay-out. If you died in the nineteenth year, they'd only get a fraction of the amount you started with. Although much less popular than level-term life cover, decreasing term policies are also much, much cheaper.

Whole of Life Assurance – called ‘assurance’ instead of ‘insurance’ because you know (are assured) that this policy will pay out eventually. Like Level-Term Insurance, Whole of Life pays a lump-sum, but this time there’s no end date on the plan. It doesn't matter if you die in ten, twenty, thirty years or more, it'll still pay the same amount. Because the payment is guaranteed to happen eventually, these policies are far more expensive than term life cover. Even so, it's an extremely cost-effective way to mitigate inheritance tax and provide a financial legacy for future generations. That's because for High-Net-Worth individuals leaving a significant inheritance, the policy will be written in Trust so it doesn't fall into the estate and become subject to inheritance tax (IHT). And even when paid over 30, 40 years or more, the total outlay will STILL be far less than 40% IHT on a large inheritance.

Mortgage Protection – this simply covers the outstanding debt on your mortgage. In most cases, the potential payout goes down as your mortgage is paid off. Most people think their family is secure because they have mortgage protection, but if something happens it’s the bank who gets the money, not your loved ones. Chances are, they'll need to sell the house and downsize in order to survive, unless there's additional life cover in place.

There are also much cheaper versions of Life Cover, although payouts are usually much smaller. For example, you might consider ‘Family Income Benefit’ or simple a funeral plan if funds are tight.

It’s important to know you have the right type of cover for your needs, and in some cases a mixture of different policies might be the most cost-effective way to get the protection you need.

That’s why you’ll want to get advice from a protection specialist before you buy a policy. They’ll get to know you, understand your situation, and recommend the right plans for your circumstances and budget.

Does Life Insurance Really Pay Out?

There’s a common misconception that insurers try and ‘dodge’ paying claims, but this simply isn’t true.

By law all life insurance providers have to publish their annual claims statistics. These figures are collected by the Association of British Insurers and released each year. Here’s what the stats showed for 2015:

• 98% of all protection claims were paid out.
• 99% of all life insurance claims were paid out.
• £3.4 billion was paid in total.
• That’s £9.4 million in successful claims every day.

So don’t be put off by the occasional sensationalist story in the press. Claims are only refused when policyholders fail to tell life insurers about something that would have led to a higher premium when the policy was set up, like a pre-existing medical condition – or claiming you don’t smoke when you do.

Honest and transparency is the key.

Is the Payout Taxable?

Life insurance policies can be subject to inheritance tax, depending on your overall worth when you die and how the policy is set up. For a single person, you get a tax-free allowance of £325,000 – after which inheritance taxes of 40% are taken from your estate before it’s passed to your children.

If you’re married, there's no tax payable when one of you dies. When you've both passed away, the tax-free allowance is £650,000.

In both cases, the value of your estate could include the life insurance pay-out – unless your policy is placed in Trust. It should be noted that no comparison website is going to put a policy in Trust for you, and if you ask an IFA or solicitor to do it you’ll need to pay them for the work.

Any reputable, specialist protection adviser should be offering to put policies in Trust for free if there’s any danger of your policy being caught in the inheritance tax trap.