How Does Life Insurance Work?

Life insurance works on the basis that if you were to pass away and there are people left behind such as family members who rely on you, how would they cope if you were no longer here, not only emotionally but financially? Could your family afford to pay the mortgage or the ongoing bills, is there enough money to cover your children’s ongoing costs? If the answer is no, then you are an ideal person to benefit from taking out a life insurance policy. Speak to a Proadvice financial adviser today to find out which plan is most suited to you.

How does Life Insurance Work?

In the event of your death your insurance company will pay a lump sum or a monthly income to your loved ones. This pay-out can be used to pay off financial commitments such as a mortgage, loans and other debts. The life insurance plan can also be used to help to raise your children and possibly pay for school fees. The life insurance plan is in place and tailored to look after your loved ones. The life insurance plan is a selfless policy; you are taking out a plan that you will never see any benefit from yet you will be comforted with the knowledge that if something were to happen to you that your loved ones are going to be protected.

Are there Different Types of Cover?

There are four difference types of life insurance plans you can choose from;

  • A level term policy means the sum assured remains the same throughout the term of the policy and does not change, irrelevant of what you owe on your mortgage the life insurance plan will still pay out the same amount.
  • A decreasing life insurance policy means that the sum assured will decrease throughout the term of your plan. The decreasing term life insurance plan is normally suited to people with repayment mortgages. The decreasing life insurance plan is the cheaper plan when compared to level term mortgage insurance.
  • An increasing life insurance plan is where your sum assured increases in line with the Retail Price Index, (RPI). You can select your chosen rate from 2% 3% 5% etc.
  • The family income benefit plan pays out a monthly sum rather than a lump sum payment which means that every month your family can expect some money coming in, similar to as if your wages are still being paid.

Please speak to one of our experienced Proadvice financial advisers today to discuss which option is best suited to you.

Joint Life, Second death

There is an option available when taking out a life insurance policy for you to take out a joint life, second death plan. A joint life, second death plan is where a life insurance plan is taken out to cover a potential tax bill on the estate of the couple, when the second person passes away. A joint life, second death plan is normally a whole of life plan. There are a number of other uses of this plan dependent of your circumstances.

As the name states, the plan pays out only when the second person from the two named on the policy, passes away. It is usually cheaper to opt for this type of insurance policy than by opting for a joint life, first death plan.

What is a Sum Assured?

The sum assured is the amount of money that you are insured for and is the amount that will be paid to your dependents in the event of your death. You decide how much you are insured for (please note, the more cover you have the more information the insurance company will require from you). If you decide you want to be insured for a substantial sum assured the insurance company may require a medical assessment, HIV test and other blood tests as well as proof of your smoking status. Requests for these tests to be carried out and awaiting the results can delay your application. In some cases if you are requesting a substantial sum assured, the insurance provider will also require financial evidence as to why you are requesting such a considerable amount of money.

The aim of insurance is to put you, or your family in a similar financial situation as you were before the event that warrants the payout occurred, not a better situation.  This is for the same reason your car insurance provider will not replace your Ford Escort with a Ferrari if it is stolen and the same reason your life insurance provider will not suddenly make your family millionaires if you were to pass away if previously you were earning £20,000 a year, unless you can prove there is valid, financial justification for the cover.

Reviewable Life Plans

When selecting a policy, you have two options based on its return. The first is a non-reviewable premium; this means that your plan will be set in stone throughout the term of your policy. Then there is a reviewable plan, this is where your premium can increase over the term of your plan, in line with the RPI but your sum assured remains the same. If the premiums need to change over time the insurance company will contact you and you will be given two choices and these are whether to increase your premiums or reduce your cover. 

With a reviewable plan, usually the first review will not take place for approximately 10 years. If your plan has a review date for 10 years it is referred to as ‘maximum cover,’ which before taking out one of these maximum plans you need to be aware that during the term of the plan you could end up paying more into the plan than is ever likely to pay out.  

What is Level Term Mortgage Insurance?

Level term mortgage insurance pays out the same value sum assured on day one of the insurance policy to the final day of the insurance policy. The premium payable for level term mortgage insurance is more expensive than a decreasing mortgage insurance premium however the sum assured will not change throughout the term of the plan as it would with a decreasing mortgage plan. 

If you decide to take out a policy for £100,000 worth of insurance cover over a term of 20 years the plan will pay out £100,000 if you were to pass away in year one of the plan and would remain the same if you were to pass away 10 years later. The sum assured will still be £100,000. As this particular example is for a term of 20 years, this will remain the case until the final day of the plan in year 20, so the plan will pay out the same amount until the last day of the sum assured, in the twentieth year.

The level term mortgage insurance plan is ideally suited to people who may have an interest only mortgage or want to leave additional money for their family to cover any other expenses such as, car loans, bills and even funeral costs.

What is a Renewable Option?

A renewable term life insurance policy allows you to extend your term on your insurance for an additional period of time without having to re-qualify your coverage, for example, if you had a set coverage period of 5 years and have opted for a renewable plan, when you reach your 5 years of insurance anniversary, you will be given the option as to whether you wish to renew your plan (free of underwriting, so no more medical questions or information need be provided) for a further 5 years. This will be subject to you having paid your insurance premiums in full and on time. The plan often has a shorter term of, 1, 5 or 10 years.

What is a Convertible Option?

A convertible term life insurance policy can be converted into a permanent life policy at some point in the future, without requiring you to pass a health screening exam.

Normally if the level of cover stays the same the premiums will as well. As the plan only pays out on death, there is no surrender value with this policy. The cancellation of this plan will result in the cover ending and no monies paid back to you.

Interlinked Plans

An investment linked insurance plan is a life insurance that combines investment and protection. The investment linked insurance plan invests your premiums to a specified investment of your choice but also providing you with life cover. The benefit of this plan that it gives you the flexibility to choose the level of allocation you wish to go towards protection and how much you wish to go towards investment. You need to be cautious with this plan and careful to choose the correct amount of funds to invest whilst ensuring that you select the life cover plan that best suits your needs.

What is the Education Cover?

Educational cover is an ‘add on’ to a life insurance plan which pays a range of benefits for each child included on your plan, to help cover the costs of their education, if you were no longer here to provide for them. The plan will pay out different amounts depending on if your children go to state school or to a private school and will cover them until they have left university, if they choose to go. If your child/children do not choose to go on and stay in education or go on to university, the cover will be valid until they reach the age of 18.Typical things that are included within the cover are;

  • Uniform
  • P.E. kit
  • Class materials
  • Stationery items
  • School fees
  • Swimming/sport lessons
  • School trips
  • Any other school related activates

The aim of the education cover plan is to ensure that your children do not miss out on their childhood education should the worst happen to you.

Womens Life Cover

According to a recent study carried out by Friends Life, (an established insurance provider), two thirds of women have never taken out a life cover policy. The main reason identified in the survey is they did not see it as a priority or thought it was too expensive. 

The irony in this is that until December 2012 life insurance for women was almost always cheaper than when compared to life insurance for men. Life insurance for women increased once the gender ruling came into force in December 2012 making it a rule that everyone applying for insurance, irrespective of gender was assessed in the same way. While life cover policies increased in cost the majority of sickness plans, such as income protection and critical illness cover actually decreased for women, due to the new gender ruling.

The view in that women stay at home and look after the children, while the men go out to work is outdated in our modern society. In many households it is often the women who bring home the higher income and therefore it makes complete sense that women should be thinking about protecting the families income equally as much as men. Housewives and househusbands should still look to be insured even if they do not bring in an income to the family. The work they do is invaluable and if they were to pass away it would soon become apparent. 

The work carried out by a stay at home house person it is estimated to be worth £31,627 per year (1) that is £7,681 more than the average salary for people who work. It is estimated that the average house person works 70 hours a week at home and only benefit from 6.5 hours to themselves, a week.

1. Legal & General’s Value of a Parent 2013 research report.

Life Insurance  with Total Permanent Disability (TPD)

Life Insurance plans can have total permanent disability (TPD) insurance added to their cover, if required. It is normally a cheaper way of adding a sickness plan to your life insurance cover than adding critical illness cover. The insurance plan pays out on death but also on serious medical conditions which result in you being unable to work ever again.  The sum assured for TPD is usually the same as the sum assured for the life insurance plan. As with income protection there are three different definitions on TPD

  • Own occupation: pays out if you are unable to do your own job
  • Suited occupation will pay out if you are unable to do a job of similar skills and experiences
  • Works tasks. Pays out if you cannot perform a certain number of activities from a specified list

What is Income Protection?

Income Protection is a form of insurance that will replace part of your income (tax free), if you are unable to work for a long period of time due to illness or disability and will usually continue to pay out until you can return to some kind of paid work or until you reach retirement, whichever is sooner.

Income Protection is a name given to several products, accident and sickness cover, permanent health insurance and redundancy plans. The aim of these policies is to provide an income to you should you stop getting paid. It can cover everything from a cold or broken arm to more serious conditions like heart attacks and cancer. The plan can also be used to top up any work benefits you may have. 

There are a number of choices you have to make when taking out income protection insurance. The key part of income protection is to ensure you are covered for your ‘Own Occupation.’ To be covered for own occupation means that whatever prevents you from doing your own job the policy will pay out. If you take out a cheaper work or suited occupation policy, you may find yourself in a unique situation where you are too sick to work but not sick enough to claim.  

The amount of income protection you need is also a personal choice. Many people take out between 50-65% of their annual salary. By law, you are entitled to 28 weeks statutory sick pay at £87.55 a week. Now ask yourself, would you be able to live on £87.55 a week?

An income protection plan allows you to choose a deferred period. If you are lucky enough to receive sick pay from your employment, then to save money you could have a longer deferred period to match your sick pay with work, typically 13 weeks, 6 months or even a year. If you have no sick pay through your employment or are self-employed, your deferred period can be straight away, a week or if you have savings, several months.

You cannot make a claim on an income protection policy while you are receiving sick pay from your employer. Please be aware that you cannot be in a better financial situation claiming on an insurance plan than by working. 

The biggest factor on the price you pay for income protection is the job you do. An office worker would typically pay less for a policy than a builder, even if they are the same age, have the same sum assured and the same deferred period. The reason for this is a builder is considered to be a higher risk occupation than an office worker. 

Do I need Income Protection?

Imagine that you are fortunate enough to own a machine that prints out £2,000 at the end of each month. Every single month £2,000 in cash is printed out. It is the greatest invention ever but there is only one machine, if it breaks that is it, there is no more money. 

You can spend that money on anything you like; you buy a house, go on holiday, buy your food and pay your bills with that money. 

Now, how much would you pay to insure that machine? The machine is your only source of income and if the machine breaks down you will stop getting the £2,000. You stop being able to pay for your mortgage, stop going on holidays and stop paying your bills.

Would you pay to insure this machine? If you have answered yes then you need income protection. I am sure by now you have probably guessed, you are that machine!  

(We will act only as introducers for convertible plans, maximum benefit plans and investment linked whole of life plans.)

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