Time for some life insurance adivce. It’s a sad statistic that, before they’ve reached adulthood, almost 1 in 30 children will have to deal with the death of a parent.
This is why having Life Insurance to protect your family’s finances should the worst happen to you is so important.
My article takes a look at the different types of Life Insurance policy, and how to avoid those hidden costs and get the cheapest deal possible.
Want to know what you need to know about Life Insurance?
Then read on!
Which Type Of Life Insurance Is Right For Me?
There isn’t just one type of Life Insurance, that would be too easy.
Some types of Life Insurance policy are primarily to protect your mortgage, and some are to protect any dependents you may have.
There are even types you can take out that mean your family won’t have to pay inheritance tax.
For the purposes of this article I’m going to focus on the policies designed to pay out a lump sum to your family if you were to die, something I believe every adult who has someone who depends on them should consider.
So, if you decide that purchasing Life Insurance is the right thing for you, how can you get it as cheaply as possible?
I’m glad you asked….
What Is Level Term Life Insurance?
This is Life Insurance in its simplest form – it pays out a set amount to your family if you die within a fixed term.
The name of this type of insurance says it all:
Level –Regardless of when during the term, the amount paid out is the same, it does not vary.
Term –The length of time you’re insured for (eg: 20 years)
It goes without saying that the longer the term, and the more cover you have, the higher your monthly premiums will be.
Because there’s normally very little dispute when it comes to paying out on a Life Insurance policy, (afterall, dead is dead – there’s little to no room for error there), you can take out a cheaper policy and still get paid out under the same terms as taking out a more expensive policy.
What Are The Other Types Of Life Insurance Available?
The other types of Life Insurance, that I briefly mentioned earlier, fulfil different roles.
1. Mortgage/Decreasing Term Insurance
This will pay off your mortgage if you die within a set term.
Because the amount you owe on your mortgage decreases over time, the amount this policy pays out decreases in line with that.
It’s a cheaper policy to take out than Level Term Life Insurance, because usually the insurer stands to pay out a lot less if you were to pass away.
However, if you want to leave a lump sum to your family then a Level Term Life Insurance policy, although more expensive, is the way to go.
2. Whole Of Life Insurance
This type of Life Insurance policy is mainly purchased in order to avoid having to pay inheritance tax, and is normally investment-linked.
When you die, the payment amount will cover any inheritance tax bill, meaning that your family won’t have to try and raise the money to cover it themselves before they can receive any assets you want to leave them.
The policy runs out when you die, rather than lasting for a specific period of time.
Does Everyone Need Life Insurance?
If you are single and have no dependents, you might question why you need to bother with a Life Insurance policy – and the short answer is, you don’t.
Life Insurance only pays out once you are gone, so if there’s no one you want to leave money to, then there’s no need to have a policy.
However, if you have children, a partner, or anyone else who relies on your income, and who would struggle to keep up with the mortgage, bills and other expenses without you, then getting Life Insurance is a cheap way to solve that problem.
How Much Should My Life Insurance Policy Be For?
As a general rule you want to cover roughly 10 times the main breadwinner’s income.
You’ll want there to be enough money to take into account:
1. Any outstanding debts that will need to be paid off – including your mortgage
2. Expenses such as funeral costs
3. Future spending, such as university fees or helping towards a car or a flat deposit
4. Day to day outgoings such as food shopping, clothing etc
See also About Life Insurance With Cancer
Ten times your annual income may seem excessive, but don’t forget that with the rate of inflation the value of that payout will be worth less in the future than it is now.
Your dependents won’t have to pay income tax on this pay out, but it does count as part of your estate, so if the total of your assets is above the inheritance tax threshold they will have to pay 40% in tax!
This can be avoided by putting your policy in trust…
How Can I Avoid Paying Inheritance Tax?
It is possible to avoid your dependents having to pay a large inheritance tax bill but writing your policy in trust when you take it out.
This means that when you die, the payment is made directly to your dependents rather than becoming part of your estate.
This is easy to do – most insurance policies include the option for writing in trust at no extra charge.
How Long Should The Term Of My Life Insurance Policy Be?
If you have children you’ll want your Life Insurance policy to cover them until they are no longer financially dependent on you; generally until they are no longer in full-time education.
If you might have children later on it’s worth thinking about when that will be and factor it into the length of your policy now, rather than take another one out later when they are born.
This is because the older you are, the more expensive Life Insurance is going to be.
If you don’t have children and you are taking out Life Insurance in order to financially support a partner in the event of your death, I would recommend the term lasting until they reach pensionable age (planned retirement age).
Remember, you don’t have to stick to round numbers when it comes to the term of your policy; you could have a term of 16 years for example.
Is A Joint Life Insurance Policy With My Partner Going To Be Cheaper?
To understand what you need to know about Life Insurance, you need to understand policies.
If you and your partner both want to take out a Life Insurance policy, you can either take them out separately or buy a joint policy.
A joint policy normally works out a little cheaper but it only pays out once, normally when the first person dies.
There are advantages and disadvantages to both.
The Advantages Of A Joint Life Insurance Policy
Cheaper than purchasing two single policies
If you are married but have no children it’s easier to set up a joint policy than two single ones
The Disadvantages Of A Joint Life Insurance Policy
You only get one pay out, usually when the first policyholder dies, whereas single policies pay out twice – which would be more beneficial when it comes to providing for any dependents
If you and your partner split up you might have to cancel the policy and purchase a single policy, which is likely to be more expensive based on your increased age and potential changes in health
The Advantages Of A Single Life Insurance Policy
Because two single policies will pay out on the death of each policyholder you could get two pay outs instead of one
You wouldn’t have to buy a new policy if you split up with your partner
The Disadvantages Of A Single Life Insurance Policy
Generally more expensive than a joint policy
If you are married and have no children you only need one payment, which would go to your partner
The Less Likely You Are To Die, The Cheaper Your Life Insurance Will Be
It seems an obvious point to make, but the lower risk you are at of dying, the cheaper your Life Insurance payments will be.
If you work in a high-risk job, are a smoker, or wrestle alligators in your spare time, you’re a lot less likely to find a good deal.
It’s important to disclose everything when you take out your policy, as this is the main reason that insurance companies don’t pay out.
If you’ve had problems with something like a pre-existing medical condition it’s worth speaking to a broker as they’ll know which insurers are more likely to offer you a policy.
See also Free Parent Life Insurance Cover For Parents with Aviva
Will My Insurance Premiums Be Cheaper If I Quit Smoking?
Obviously when it comes to asking questions about your health in order to insure you, ‘Do you smoke?’, is the big one.
Non-smokers pay a lot less in monthly premiums than smokers simply because they are a lot less likely to die during the term of the policy.
To qualify as a non-smoker you need to have been nicotine-free for at least a year, including not using products such as e-cigs and other forms of nicotine replacement.
If you are smoke-free for over a year it’s well worth seeing if you could get a better deal and save money.
Never be tempted to lie about your smoker status; if you were to die and it’s discovered that you were a smoker when you claimed not to be, it could make your policy invalid.
If you’re a smoker who is genuinely giving up, it might be worth having it noted on your medical records so that you could back up any potential claim.
Could I Save Money If I Switch My Existing Life Insurance Policy?
If you already have a Level Term policy and you find one that offers equal cover for cheaper monthly premiums, you can set up new cover and cancel your existing policy.
Always remember to check the T&Cs to make sure that you are covered for the same things you were with your previous policy.
Of course, there’s no guarantee that you’ll find cover cheaper than your existing policy – particularly if you’ve had the policy for years or your health has deteriorated, as the savings you would make with a cheaper policy could be cancelled out by your increased age or risk level.
Taking out a Life Insurance policy is a long-term decision, so what happens if during the term of that policy something goes wrong? – and I’m not talking about something going wrong on your end, such as not being able to afford your payments.
What would happen if the company you take your policy out with isn’t doing as well in 20 years time as it is now?…..
What Happens If My Life Insurance Provider Goes Bust?
If this were to happen to you the Financial Services Compensation Scheme (FSCS) would find another insurer to take over, or issue a substitute policy.
If you need to make a claim before a new insurer can be found, the FSCS will ensure that you are covered.
When you take a policy out, check that they are on the FSCS register.
Is It Cheaper To Go Buy My Life Insurance Policy Direct?
Going straight to an insurer for your Life Insurance policy is likely to be the most expensive way to do it, which is why the majority of people will check an online price comparison site first.
Because these sites are designed to search the market for you and find you the cheapest deal, it can make you think you’ve saved big!
But, before you start feeling too smug, it’s worth knowing that these sites take a huge chunk of commission.
So how can you save money?
Going To A Broker Or Financial Advisor For Your Life Insurance Policy
And now finally to really answer “What you need to know About Life Insurance?”
As great as comparison sites sound, it’s important to remember that they are just that, comparison sites.
Price comparison sites can’t give you any advice or answer any questions you might have about which Life Insurance policy best suits you and your family’s needs.
Therefore I would always recommend speaking to an expert before you take out any type of insurance.
Licenced brokers are government regulated so you can be sure that any advice they give will always be in your best interest.
Because they work closely with insurance companies they can often secure deals for you that you wouldn’t be offered otherwise, and often have working relationships with insurers who aren’t on price comparison sites.
Their advice is invaluable and can save you a lot of money in the long run.
Has this article explained what you need to know About Life Insurance? Well we hope you feel like we have helped and answered your question.
Do feel free to call us for advice – we’d love to help you find the right policy for you.