Life insurance: A guide to getting protected

Taking out life insurance may not be the most cheerful prospect. Gaynor Pengelly takes a look at protection.

Caught up in the business of living, most of us pay scant regard to the grim reaper lurking around the corner.
But leaving your family well provided for in the event of a tragedy should be at the top of your financial to do list, especially if you have young dependents.

Life insurance should not be the sole preserve of the “breadwinner”, the death of a spouse who stays at home to raises the children, could lead to financial ruin if outside help, such as a live in nanny was required.

A simple explanation of life insurance is that an insurance company will pay your family either a lump sum or several smaller sums in the event of your death. Policies differ enormously; some will guarantee a payout, others expire after a fixed period of time. Some have premiums and payouts that are rigid, while others provide flexibility.

There are several questions to ask before signing up for a life assurance policy. What sort of cover do I require? How much cover should I take out? Do I need basic life assurance or critical illness cover, and should I take tax advice?

Unlike health related insurance policies, life insurance is a straight-forward policy. There are no complicated criteria to be met, either you are dead or you are not.

That means you can shop around for the cheapest policy without compromising the level of cover.

There are three types of life insurance – level term assurance, decreasing term insurance or whole of life policies.

Level term insurance is taken out for a chosen period of time, known as the term. This can be anything from a handful of years to several decades but should be based on the stretch of time when your family are financially dependent on you. It is often taken out to cover the cost of a loan or an interest only mortgage.

If you die the insurer guarantees to pay the benefits within the chosen time, if you survive to the end of the policy’s term, no benefit will be paid.

With decreasing term assurance the benefit you will receive falls each year until the end of the policy’s term. This type of insurance is often bought to run alongside a repayment mortgage, where capital value reduces over the term of the mortgage. As such, decreasing term assurance is typically cheaper than level term insurance.

Whole of life assurance guarantees to pay out a lump sum when you die and there is no specified term. As long as the premiums are paid then payment is pretty much guaranteed. For this reason, whole of life policies tend to be more expensive than basic term assurance and is typically used in estate planning as a way to meet Inheritance Tax Liabilities.

When deciding how much life insurance you should take out, you should calculate the amount you would need to pay off all debts, a mortgage and provide a comfortable standard of living for your family.

If you feel these costs will fall over the passing of time, for example your mortgage will be paid off, your children will leave home, and you could keep premiums down by opting for decreasing level term assurance.

Most homeowners already have mortgage term assurance, which is often sold with a mortgage. If this is the case, you can deduct the cost of your mortgage from the amount of life insurance you require.

There are several steps you can take to ensure you get the best value for money from your life insurance policy.
For example, couples often take out joint life insurance, which pays the same sum if either person dies. However, this is only suitable if both people require the same level of cover.

While a joint policy is cheaper, it is only fractionally cheaper, than taking out two single life policies with the same sum assured for each person. And signing up for two life separate covers will give you the peace of mind of knowing that if both of you die, your dependents would get twice the pay out.

When taking out life insurance it is also vital to ensure it is written “in trust”. In other words, the proceeds from the life insurance would fall outside your estate should you die, and therefore would not be considered when calculating inheritance tax.
The price you will pay for life insurance varies widely and is largely down to factors such as: the type of policy you choose, the length of the policy term, the size of the death benefit, the flexibility of the policy, number of people covered by the policy etc.

When deciding how much premium you will pay, insurers take into account your your age, your state of health; whether or not you smoke what you do for a living and similar questions. They will likely also wish to know whether certain diseases and conditions run in your family, such as cancer, heart disease or other potentially fatal conditions.

While there is nothing you can do about age and gender, it is certainly worth quitting smoking and losing weight to reduce the cost of your life insurance.

Life assurance is widely available from insurance providers, traditional insurance brokers or you could even pick a policy up off the shelves at supermarkets.

Always do your home work and read policy wording carefully before signing on the dotted line. It is well worth enlisting the help of an insurance broker or financial advisor, who will search the whole market of insurers for you and often match or better, the best prices you can get from searching the market yourself.

Gaynor Pengelly