What You Need To Know About Life Insurance?
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, which is why having Life Insurance to protect your family’s finances should the worst happen to you is so important. This article takes a look at the different types of 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, well 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 are primarily to protect your mortgage, and some 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….
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.
Other Types Of Life Insurance Available
The other types of Life Insurance, that I briefly mentioned earlier, that fulfil different roles. For example:
- 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, but 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.
- Whole Of Life Insurance – These are mainly purchased in order to avoid having to pay inheritance tax, and are 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 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 and a partner, or anyone who relies on your income, 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 I Be Insured For?
As a general rule I would recommend that you want to cover roughly 10 times the main breadwinner’s income. You’ll want there to be enough money to take into account:
- Any outstanding debts that will need to be paid off – including your mortgage
- Expenses such as funeral costs
- Future spending, such as university fees or helping towards a car or a flat deposit
- Day to day outgoings such as food shopping, clothing etc
Ten times your annual income may seem excessive, but don’t forget that with the rate of inflation the value of that pay out 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…
Avoiding 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 Be?
If you have children you’ll want the 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 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.
Joint Policy Pros
- 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
Joint Policy Cons
- 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
Single Policy Pros
- Because two single policies will pay out on the death of each policy holder 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
Single Policy Cons
- 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 It 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.
What 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.
If I Switch From My Existing Policy, Could I Save Money?
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 If My 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 needed to make a claim before a new insurer could 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 Policy Direct?
No. 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?
Independent Broker/Financial Advisor
Finally to really answer “What you need to know About Life Insurance?”. As great as this sounds it’s important to remember that comparison sites, are just that, comparison sites. 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.
Some do charge for their services (we don’t by the way!), but their advice is invaluable and can save you a lot of money in the long run.
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 free impartial advice.
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