Life Insurance
Life insurance is designed to payout a specified cash lump sum if you die during the length of the policy. When choosing a life insurance policy, you'll need to decide on how much the policy will payout, how long will the policy last and who the payout goes to if your die.
How Life Insurance works
Life insurance delivers peace of mind by providing money for your loved ones when you die.
Life cover can be used in many versatile forms, whether planning with your estate to be passed to the next generation or protecting your value as a business owner, our advisers can help you understand the key elements of these important planning areas to make informed choices as part of your overall plan.
Life insurance is a contract arranged between you and an insurer. In return for you paying regular premiums, the insurer will pay out a sum of money in the event of your death.
Life insurance is also known as "life cover" and "death cover". Note that this type of insurance pays out to your beneficiaries ie. the people who survive you and stand to benefit from your financial legacy. You personally will never reap the financial benefits of life insurance, because it is your own life that will have ended to trigger any payout. However, your loved ones will not have to face financial strain if you are no longer there to support them.
A life insurance policy can act as the centrepoint of your financial legacy to those that survive you. If you want to build a powerful structure of financial products to look after your family both before and after your death, life insurance policies work very well with other insurance products (such as critical illness insurance) and legal mechanisms (such as Trusts).
Ask your IFA how life insurance can work for you and your unique financial situation.
What does Life Insurance cover?
Life insurance covers death, but not all types of death.
As with all types of insurance, exclusions apply. Commonly, for example, death by drug or alcohol abuse is not covered. If your life involves dangerous sports, you are likely to pay higher premiums.
Note that life insurance only pays out after your death. It does not generally cover terminal illness or disability (although some policies do cater restrictively for terminal illness).
A sensible strategy is to use life insurance in conjunction with other forms of insurance, such as critical illness cover or income protection cover. Life insurance can also be written "in Trust" – ie. as part of a Trust legal arrangement – for a variety of practical and tax advantages.
What life insurance do I need?
It is up to you to decide how much financial cover you want in the event of your death. But remember that the bigger payout you want, the higher your monthly premiums will be.
Check that you do not already have life insurance with your employer. Some packages include "death in service" benefits which will deliver a cash sum in the event of your death – but only if you are still working for that company.
So what types of life insurance are there to choose from? The market is divided into two types of policy depending on the length of coverage provided:
- Whole-of-life policies
- Term life policies
Whole-of-life policies will pay out regardless of when you die – provided you keep paying the premiums.
Term life policies run for a fixed "term" (often 5,10,25 years) and will only pay out if you die during the term.
Where to buy life insurance?
You can buy life insurance from:
- Your IFA (who will know what to look for)
- Direct from an insurer online
- Your mortgage broker (who may offer you life insurance when you get a mortgage)
- Your bank
- Online comparison sites
- Many retailers, including big supermarkets
Using a broker means you get an expert overview of the market. Moneyadviceservice.org.uk says, "These market experts can often help you find the insurance product you need at a good price."
The cost of your life insurance coverage will depend on:
- how much of a payout you want your life to be insured for
- a variety of factors personal to you, including your age, health, job and medical history
If you are worried about keeping up with payments for your life insurance, look into "waiver of premium" cover. This will increase the overall cost of your coverage, but cover your monthly payments if you cannot work through injury or illness (note: many conditions apply).
Why life insurance is a good investment
Life insurance is a particularly good investment if you have people who depend upon you for financial support. That means school age children, a partner – a family.
"Often just a few pence a day is all you need to provide your loved ones with plenty of financial protection (depending on your age and health status)." (moneyadviceservice.org.uk)
On the other hand, life insurance is not for everybody. Remember that the payout for life insurance goes to the loved ones that survive you. So if you are single with no dependants and no plans to pass anything on to anybody else, this type of insurance may not be necessary.