Life Insurance Guide
Dying is not generally something people wish to spend their time thinking about and this is perhaps one of the reasons people may put off taking out life insurance cover. It is a fact that 1 in 3 people actually have no life insurance at all! If you have loved ones who could face a financial crisis, should you pass away, then it is of paramount importance that you take some time to consider life insurance and the benefits it offers.
A life insurance policy can be used to ensure that your loved ones are protected and financially secure in the event of your death. If you die unexpectedly, the pay-out can go towards paying off the mortgage and assisting with the living costs for your family after you have gone. Whilst the money from the life insurance pay-out cannot replace a loved one, it can help relieve your family of some of the financial pressures they may experience without your life cover in place.
In the event of your death, your insurance provider will pay out a lump sum or a monthly income. This sum of money can be used to pay off any financial commitments, for example, the money can go towards paying off your mortgage, any loans and debts or even towards paying for the children’s school fees. The life insurance plan is there to look after your loved ones. You, yourself will never benefit from the policy other than having peace of mind that should the worst happen to you, your family should not have any money worries in times that are already tough.
The life insurance plan is, in short, a selfless policy that will see your loved ones protected and able to manage financially.
There are various types of life insurance plans currently available in the market. The cheapest policy may not necessarily be the best, so it is important to consider your needs and those of your family before you take out a policy.
Key areas that should be considered when taking out a life insurance policy are:
- The size of your mortgage and any other major debts
- How much you earn
- If you have a young family, how much they will require to support them until the children are grown up
- Whether your family will have to pay inheritance tax
Important concepts to understand when considering insurance are;
- Term: The period of time a policy has been set over
- Sum Assured: The amount of insurance cover you have that the insurance provider would pay out
- Premium: The monthly amount payable to insurance provider for your cover
- Life Assured: Person insured.
- Policy Holder: Person insurerd
- Insurer: The insurance company/provider
- Policy/ Plan: The type of insurance taken out
- Life Insurance: Pays out a lump sum upon death of policy holder
- Terminal Illness: Pays out a lump sum if the policyholder is dialogised with a terminal illness (often free with life insurance cover)
- Critical Illness: Pays a lump sum if the policyholder is diagnosed with one of the critical illnesses listed in the insurance policy
- Income Protection: Pays out a percentage of the policy holders salary if they are off work due to illness
- Waiver of Premium: Waiver of premium provides a means of insuring your monthly premiums in the event that you are unable to work through ill health
- Guaranteed Premiums: Guaranteed premiums ensure that the premium price will never increase throughout the term of the policy
- Reviewable premiums: With reviewable premiums the insurer will conduct a review of your policy at the intervals specified in the Key Features Document
- RPI: Retail Price Index (RPI), is a measure of inflation published monthly by the Office for National Statistics. It measures monthly the official change in the cost of a sample of goods and services
- Underwriting: The process the insurance companies go through before deciding if they can insure you and at what price
- Deferred Period: The period of time you have to wait before receiving a lam?? on a protection plan. Most commonly used with waiver of premium and income protection
- Level Term: The sum assured will not change throughout the term of the plan
- Decreasing Term: The sum assured will decrease throughout the term of the plan. This is normally in line with a repayment mortgage
- Family Income Benefit: The sum assured is paid as a monthly income rather than as a lump sum
A 'level term plan' is one of the options that is available to you in respect of your life insurance. A level term plan on a claim will pay the same sum assured on the first day as it would on the last.
For example a 20 year level term plan for a sum assured, of £150,000 will stay the same and pay out the £150,000 whether you die unexpectedly in year 1 of the policy or year 20 of the policy. The money is not subject to inflation or Retail Price Index (RPI), it simply remains level throughout.
A level term insurance plan is likely to be more suited to someone with an interest only mortgage due to the fact that the capital does not reduce over the term of the mortgage and neither does the life insurance amount.
This is ideal as you know no matter what happens the sum assured will be what was agreed on your policy regardless of what is owed on the mortgage.
A level term insurance plan is also an excellent way of protecting a personal loan or car finance. By being able to leave a specific amount when you die, the people left behind will be able to cover your remaining debts or loans.
Other important options to consider when looking to take out a life insurance policy are a decreasing term insurance plan and an increasing term insurance plan.
If you have a repayment mortgage, the cheaper option for you would be to take out a decreasing plan (see below), however, most people will move home several times in their lifetime and when they do, they generally tend to move and improve. With a level term plan, all you would need to do is add the additional amount that your mortgage has increased by to the sum assured on your existing policy. For example, with a £100,000 mortgage, if you were move 10 years later and purchase a house for £115,000, all you would need to do it take out a new plan for the additional £15,000, however, if you take out a decreasing plan then you would be required to take out a brand new plan for the whole £115,000 and as you will be 10 years older the premiums would also now be 10 years older and therefore would cost more.
A popular way of protecting a mortgage is to take out a decreasing plan. The sum assured with a decreasing term plan will decrease throughout the term of your policy and is normally useful for people with repayment mortgages. This life insurance plan is the cheaper plan when compared to level term insurance.
- If you take out a decreasing policy for £200,000 over a term of 20 years, the plan will pay £200,000 if you die in year one
- 10 years later the premium will not have changed however the sum assured will now be worth £100,000 if you were to pass away.
- The decreasing plan will only work to cover a mortgage if you have a capital and repayment mortgage and the interest rate on the mortgage is less than the insurance percentage rate.
A decreasing term insurance plan is where the premiums for your policy remain the same but the sum assured reduces by a pre-determined percentage, over the term of the insurance plan. This option is usually used in conjunction with your mortgage to cover the outstanding balance. Just as your mortgage amount will decrease over time, so will your insurance pay out value. If you are to survive the term of the decreasing life insurance policy, there would be no pay-out, as with all term plans there is no cash in value. It is of paramount importance that the amount you are insured for and the term of your policy are the same as your mortgage or upon death, your family may not receive a large enough pay-out from your insurer to cover the remaining debts.
An increasing term life insurance plan is where the premiums remain level but automatically increases the death benefit, (sum assured), each year by a pre determined percentage. The sum assured increases in line with the Retail Price Index (RPI).
The aim of an increasing term life insurance plan is to increase the sum assured in line with the cost of living. As the cost of living goes up with inflation, you can amend the plan to suit your changing circumstances. It allows you to ensure your family always has a sum assured that is relevant to the time.
When you consider the average cost price of a house in 1982 was £25,000 (1), in comparison to the property prices in today’s market that would possibly only cover the deposit as the current average house price in the UK is approximately £254,000 (2). The aim behind increasing plans is to ensure that your sum assured stays relevant to the times and inflation, irrespective of how long you have set your insurance term for.
A lump sum pay-out is not always suitable for families and monthly payments may be more manageable. If this is the case then a Family Income Benefit plan may be more suited to your circumstances.
In many cases, when a life insurance lump sum is paid out to a family, it surprises many people when they come to the realisation that £100,000 life cover may not stretch very far and they may run out a lot quicker than had been anticipated.
The average salary in the UK is £26,000 per annum (2) which means that a pay out of £100,000 may only last for approximately a little under 4 years. This is based on the principle that your family are able to utilise the funds efficiently and as a steady income and not take advantage of the additional monies received in the form of a substantial lump sum. Even with the best intentions in mind, temptation can sometimes prevail. This may severely impact the safety net that the life insurance plan was put into place for, such as supporting the family for a number of years.
Imagine if you were to be paid your entire years salary up front at the beginning of every year. Would you find it difficult to budget the money over the 12 month period?
This is where ‘Family Income Benefit’ can be advantageous.
Family income benefit is a form of life insurance that entitles your family to a regular income rather than a payment in a lump sum. Family income benefit can help your family to cope with the loss of earnings suffered if you were to unexpectedly pass away.
Family income benefit, as with life insurance is set over a term however the drawback with family income benefit is that it will only pay out over that agreed term. For example, if you were to take the family income benefit out over a term of 10 years, should you pass away 6 months before the term was due to expire; your family would only be paid out for the 6 remaining months in the term.
As well as having the option to choose how your insurance plan is paid out, you also have the choice as to what type of premiums you will pay. The options you have are guaranteed premiums, reviewable premiums and age costed premiums.
A guaranteed premium will never increase throughout the term of the policy so the monthly amount you pay to the insurance company will remain the same for the chosen term. The drawback to this is that you will pay a premium for the privilege of securing the rates now.
An insurance policy with reviewable premiums means that the insurance company will conduct a review of your policy at regular intervals, (usually every five years). The review the premium cost is liable to change but as it is not known at the interludes as to which way the premium cost can go, whether it be an increase or decrease, the premiums are initially cheaper when compared with guaranteed premiums, due to the element of risk involved. Reviewable rates for protection are often subject to change based on claims and company performance. Many people choose to opt for reviewable premiums on the basis that their life is going to almost certainly be subject to change throughout the term of the plan. People may not want to pay more upfront for their policy especially if they may be contemplating a move or re-mortgage or perhaps considering starting a family.
The drawback of reviewable premiums is that if your health situation changes, you may not be able to swap insurance companies in 5 years’ time and benefit from the lower premiums that you had hoped for and that may be available elsewhere. Historically, reviewable premiums do not change massively at each review and in some cases, have been known to stay the same or decrease.
The UK is unique when it comes to life insurance premiums; many other countries have what is known as ‘age costed premiums’ which is where the older you become, the more expensive your premiums will become. In effect, the older you get, the more likely you are to make a claim on your insurance and this is reflected in the premium price. In the UK we usually pay the mean price which is basically the average, set over the term of the policy, so we may pay slightly more initially but the cost will not rise based on our increase in age as opposed to the age costed premium that will increase in cost, the older we get.
The majority of people take out their life insurance policy when they are young, fit and healthy which is an extremely wise decision, as this is the time when your premiums will be offered to you at their cheapest. The first inclination to obtain life insurance may be when buying their first home as life insurance is often required to be accepted for a mortgage. If a partner was to suddenly die in years to come and the surviving partner was to try and take out new life cover, they may find it more difficult due to factors such as age or if your health is to deteriorate over the years.
Many factors can affect an application for life insurance, every day conditions for example; blood pressure, cholesterol and other common ailments can make obtaining a life insurance policy, much harder to do and later in life some of these conditions are often harder to avoid.
We at Proadvice often recommend for couples to take out two single policies, rather than a joint insurance plan. The cost may often be cheaper for a joint policy but the difference is relatively small, especially when you consider that the sum assured has doubled in value based on two single policies. Single insurance policies are also one way to avoid being left in a situation where it is hard for you to obtain a joint insurance policy for both partners due to one person perhaps suffering from a medical condition.
Mr and Mrs Smith have a joint insurance policy for £150,000 over a term of 20 years.
Mr and Mrs Smith have two single polices for £150,000 each over a term of 20 years. This is a total of £300,000 worth of cover; the sum assured has just doubled!
The two single life insurance policies will also enable the partners to amend their own level of cover, if required, as time goes by. The partners are not required to have the same level of cover or sum assured and their policy can be tailored to meet the requirements and circumstances of them as individuals, whereas, with a joint plan, the couple would be required to have the same level of cover.
The single policies will also allow the individuals people to pay for their own share of insurance which can be useful if one of them has a medical condition that could affect the underwriting of the policy, it also allows the partner with the medical condition to take out a lesser sum assured figure, for example covering 50% of the mortgage. This allows the life assured to have an affordable life insurance cover. Underwriting is where the insurer evaluates the risk of potential clients and whether and on what basis they should be accepted.
Should the couple’s relationship break down, it also allows the individual to continue with their existing life cover separately rather than having to reapply.
The additional risk to the insurance company for the policy is minimal as there is the same considered risk of a claim being made on a single plan as there is a joint plan.
Another option for consideration is a ‘joint life, second death’ plan. A joint life, second death plan is where the policy will only pay out when the second person passes away and this is usually a whole of life plan and can be taken out to cover a potential tax bill, (Inheritance Tax), on the estate when the second person passes away.
A whole of life plan is where, as the name suggests, it is intended to stay in place and cover you for your lifetime, provided the monthly premiums are maintained. The premiums for a whole of life plan are not always required to be paid until death as on some insurance polices the premium payments will cease at a certain age.
The length of the any protection plan is your decision. Most people tend to go for the term insurance plan so choose how long they wish to be covered for. By choosing how long you want your insurance for, the insurance company agree that if you pass away within the agreed term, they will pay out the sum assured value in the event of your death, however if you live beyond the term, there is no monies returned to you and no pay-out. There is however an option to take out whole of life cover and a whole of life plan will cover you for as long as you are alive and there is no set term for this plan. These plans can be used to cover mortgage costs, protect your family and even funeral expenses. As the plan has no expiry date, the cover will continue to protect you until you as the life assured passes away.
If you set your insurance plan into trust, it normally means that the pay-out of the sum assured will be tax free but with a whole of life plan, there is also a chance that you could pay more into the policy than the potential pay-out. There are no investments or cash back values with these plans.
What types of sickness plans are available to me?
Terminal illness cover is automatically included at no extra cost with all life insurance plans. The terminal illness cover will only pay out if you have been diagnosed with an incurable illness that will lead to your death within 12 months. In addition to your life insurance policy, you can also add insurance plans that cover critical illness and injury.
Critical illness cover is the most common type of cover taken out to include critical illness and injury. A typical critical illness cover plan will cover you for 30 to 40 critical illnesses, (number of illnesses are dependent on the policy selected) and will pay out on diagnosis of having one of the life-threatening conditions defined in the policy. A critical illness cover policy must cover; cancer (in an advanced state), heart attack (if sufficiently severe) and a stroke (where it results in permanent symptoms), in accordance with industry guidelines. A more comprehensive policy can in addition cover loss of hearing, loss of sight, paralysis and in some cases loss of limbs.
Critical illness polices are often taken out in conjunction with a life insurance policy and this ensures that the insurance company will pay out regardless of whether you are diagnosed with a critical illness, or you die, whichever happens first.
If you are unfortunate enough to suffer with a critical illness, it does not necessarily mean you will find yourself in a situation where you could possibly be facing death. Our great grandparents were lucky to live beyond the age of 50, yet currently the life expectancy age is 78 years old for a man and 82 for a woman. This is largely thanks to advanced medical science and procedures available to us in our time.
Not that long ago, if you had suffered a heart attack, your chance of survival could be slim in comparison to today. In the UK there are 2.7 million people living with heart disease, this is possible mainly due to these medical advancements.
Critical illness cover is of paramount importance as with such high statistics on conditions such as heart conditions in the UK, the critical illness cover is important in helping you and your family manage financially while you take time out to recover should you be unfortunate to suffer from a serious condition. Generally we are all living longer than our ancestors and more and more people are living through their medical conditions and going back to their normal, everyday lives.
Income Protection is a name given to several products, accident and sickness cover, permanent health insurance and redundancy plans. The aim of the income protection policies is to provide an income to you should you be in a position where you are no longer being paid. Income protection can cover everything from a cold or broken arm to much more serious conditions like a heart attack and cancer. The income protection plans can also be used to top up any work benefits you may have.
Income protection is available to take out as a ‘bolt on’ to your life cover or as a stand-alone plan. Income protection replaces part of your income (tax free), if you are unable to work due to an illness or injury and will continue to pay out until you can return to work or until you retire.
There is a huge emphasis put on people to take out a life insurance policy to protect their family in case of unexpected death but isn’t it equally as important to have the family interests in mind should you not be able to continue working due to unforeseen circumstances?
Your age does not necessarily have the same impact on a life insurance policy as it did years ago, for example, years ago if you were 50 years old and applied for a life insurance policy, critical illness cover or an income protection plan you may have been rejected by underwriting on that basis that due to you age, you were too big a risk to the insurance company and the chances of them having to pay out were too high. In the current day, the same rules apply to you whether you are 18 years old or 50 years old so age your has no impact yet there is now an insurance plan designed specifically and available to the over 50’s.
The insurance plan available to the over 50's is a whole of life plan that asks no medical questions. This means that the insurer will guarantee to accept and insure anyone over the age of 50 and is designed for people who do not wish to answer any medical questions on application or have a substantial medical history and may have been turned down by insurance providers for insurance elsewhere.
Due to there being no questions asked and all previous conditions discounted, these policies are often more expensive and include a number of restrictions, predominantly being that you will have no life cover within the first 2 years of your insurance policy, unless your death is accidental. In the event that a claim is made within the first two years, your premiums will be refunded.
If you have any concerns and you think that you may have a medical condition that could prevent you from being accepted for a life insurance plan, it is worth discussing this with a Proadvice adviser to see what potential impact it could have on your premium. Many common medical conditions, such as blood pressure, high cholesterol, stress or depression are well known by insurance companies and these may not affect the premiums.
Although these over ‘s plans are available to you is still advisable to try a term plan before opting for an over 50’s policy option as even with a mild loading, (increase in your premium), a term plan may still work out as a more viable and affordable insurance plan than the over 50’s plan. The over 50’s plan should ideally be kept as an alternative if you struggle to get accepted for insurance elsewhere.
What is a trust?
With all life insurance plans that are taken out, Proadvice recommend setting your plan into trust. A life insurance trust allows you to choose who you want the proceeds from your life insurance policy to go to in the event of your death; it is referred to as ‘writing in the trust.’
You can put your life insurance policy into trust either as soon as it starts or at a later date, the choice is yours and it will ensure that the potential life payout is held outside the rest of your estate, which means that in the event of your death, the pay-out can be free of inheritance tax so your family are guaranteed to receive the full sum assured.
There are three groups of people required when setting up a trust; they are, the settler, the trustees and the beneficiaries;
- The settlor is the person or people that the life insurance policy belongs to and who have set up the trust. The settler decides on who will be the trustees and who will be the beneficiaries of their policy.
- The trustees have the responsibility of looking after the trust on behalf of the beneficiaries and ensuring that the correct people get the money when the life insurance policy pays out.
- The beneficiaries are the people who get the money from the trust.
In essence, when you put a life insurance policy into trust you become the settlor. In putting the plan in trust, you are ensuring that your loved ones get the pay-out much sooner because as the proceeds from your policy do not form part of your estate, the beneficiaries do not have to wait for a Will to be read or Probate to be completed. A trust is the most time effective way that a life insurance plan will pay out and is usually within 30 days.
A trust will only come into force in the event of your death and as you are no longer there to explain what you would like to happen to the money, you have to appoint the trustees to act on your behalf. The trustee will act in a similar way to an executor on a Will and will ensure that the settlors wishes for the life insurance trust are carried out exactly as you specified and requested them to be.
The Financial Conduct Authority does not regulate trusts.
Who are Proadvice?
Here at Proadvice, our aim is to offer a high end, professional service with our team of protection specialists and customer support. Proadvice offers great customer service, quality advice and access to affordable insurance that meets your individual requirements.
Proadvcie offers you quotes from the whole of the market place with full, impartial advice on the best products available to you with insurance plans tailored to suit your needs. With the Proadvice price guarantee, we promise we will not be beaten on price.
The wealth of experience our specialist advisers possess enables them to explain and recommend the right products for you, therefore avoiding any disappointment if the need for you or your family to claim did arise.
We make it our job to understand all of the insurance policies available, inside out and understand the small print, so that you can have complete peace of mind that your insurance policy covers all of your requirements.
When buying insurance it is essential to find the right insurance company for you based on your health, hobbies, and your lifestyle as this will have a major impact on the final premium you will pay. It is our job to help you to find you the right insurance company with the very best cover for your circumstances and to also find you the most competitive rates available in the marketplace today.
Here at Proadvice we will not charge you a fee for the services we provide and can assist you on all elements of your personal protection from life insurance and critical illness cover to your income protection policy needs.
Our sole aim at Proadvice is to advise and recommend the best polices to protect you and the people who are most important to you, should the worst happen. People who come to Proadvice can be assured that when they take out a protection plan, they are going to be adequately covered.
Proadvice have years of experience in reading the small print, in fact we love the small print! It is one of the things that make Proadvice stand out from the crowd. Proadvice can advise you on the plans most suited to your circumstances and advise you on what you are covered for in your policy and just as importantly what you are not covered for, so you can have complete peace of mind before you agree to taking out the plan.
The insurance industry is an industry that wants to pay. Last year was a big year for pay-outs but it is extremely important to know that your insurance plan has been set up correctly.
Proadvice are aware that there may be more interesting and exciting things to do than setting up an insurance policy, however we also know how important it is to get it right. The insurance and financial industry is not known for simplicity and can have difficult to understand literature.