Life Insurance Guide

What is life insurance?

Life insurance is a policy taken out to cover and protect your loved ones financially in the event of your death. 

The insurance company pays out a lump sum of money (or a regular payout) to the policy holder’s beneficiaries when they die. This provides financial support in the event of their death, helping with situations such as bills, debt, childcare costs, or mortgage payments.

Why do I need life insurance?

You can take out life insurance at any time, but here are some common reasons for wanting a life insurance policy:

• You have dependents, especially children under 18 years of age - life insurance money could cover anything from nursery costs to university fees, plus all the other daily costs of having kids

• You have a partner who relies on your income

• Your family live in a house with a mortgage that you pay for or contribute towards

• Inheritance – if you want your life insurance policy to leave surviving family members with an inheritance 

• Funeral costs – funerals can cost thousands of pounds and a lump sum of money from your life insurance policy could cover this

For example, if you are the main breadwinner, a life insurance pay out could help your partner keep up with mortgage repayments, day-to-day living expenses so loved ones don’t need to change their standard of living, funeral and burial expenses, debts, and generally makes finances less of a burden for those left behind.

And life insurance isn’t very expensive, so it’s probably worth it if it gives you peace of mind that your family will be looked after financially if the worst happens.

How does life insurance work?

Life insurance is a contract between a policyholder and an insurance company. In it the policyholder agrees to pay premiums while they’re alive, to maintain the coverage.  In the event of their death, the life insurance company agrees to either make a lump sum payout or instalment payments to the named beneficiaries on the policy.

When the policyholder dies, the beneficiaries need to file a death claim with the insurance company. This requires them to submit a copy of the death certificate as soon as possible. Once the insurance company has this, they’ll review the claim and make the payout once approved.  We can help with this process.   

What life insurance should I get? 

The right type of life insurance policy for you depends on your personal circumstances like:

• Your family situation

• The number of people (if any) who are financially dependent on you

• Your budget and finances

• The size of your mortgage 

We can help you work out how much money is needed to financially protect your family in the event of your death.  We’ll need to take into account their everyday living costs, the mortgage, and any other debts.

Overall, the more protection your life insurance policy offers, the higher the premiums are going to be.  We can help you obtain a policy to provide you with enough cover, without paying for too much.   

Types of Life Insurance

1. Term life insurance 

This is a type of life insurance cover that lasts for a specific term.  It is the most common type, where people to take out life insurance for a specified period of time, e.g. ten years.  This type of policy will only pay out if you die during a specific term, which could be the length of a mortgage, or until an expected retirement age.  

There are four subcategories of term insurance:

a)     Level term life insurance:

• You choose a set number of years you want the policy to be in place for, such as five or 25 years (often when your youngest child reaches 18 years old)

• You will be paid a fixed amount by the insurer if you die within the policy term regardless of when

• The payout remains the same at whatever point you pass away during the term

For example, if you wanted cover until your new baby turns 20, you could pick a 20-year term with a £200,000 payout. 

This is a good idea if you want a policy to provide full life cover for your family (and not just the money outstanding on your mortgage).  It’s suitable to cover things like a lump sum payout for children, a fixed amount of debt, or an interest-only mortgage.  The level of cover only changes if you request a change.  

b)    Decreasing term life insurance (or Mortgage life insurance):

This is where the payout decreases each year. Again, this lasts for a pre-agreed length of time (usually the same term as a mortgage length) and pays out in the event of the policy holder’s death during that time. This tends to be the cheapest option because the payment will be less than with level term life insurance.

For example, if you take out a 10-year policy term with an agreed payout of £100,000 and you die soon after, slightly less than £100,000 will be paid out by the insurer.  If you die nine years into the policy, the payout will be much lower. This is because it is assumed that the outstanding amount to pay on your mortgage will be a lot less.

This type of policy is aimed at people whose financial commitments decrease over time, most commonly with a mortgage, because as you repay your mortgage, there’s less to pay on this policy.  It’s best for someone with dependents who would need support with a mortgage repayment, but can cover other living expenses in the event of the policy holder’s death. 

c)     Increasing term insurance: 

The amount of money paid out will increase each year (usually to keep up with inflation). 

d)    Family income benefit insurance: 

This is similar to both level and decreasing life insurance, but rather than a lump sum pay out, it will pay out a regular income (often matching current or future salary earnings) to beneficiaries for the remaining policy term. 

This type of policy is ideal for someone with dependents who would suffer financially if the policy holder passed away, and will help to avoid the need to change their current lifestyle.

2. Whole-of-life insurance

Some people take out a life insurance policy that lasts their whole life.  This type of policy is a lot less common than term life insurance.  As the name suggests, it lasts for the whole of your life, rather than a fixed amount of time.  It guarantees a lump sum payout to your family whenever you die, rather than within a fixed timeframe.  It’s one of the more expensive policies compared to term life insurance, but usually has the largest overall payout.  

This type of policy is best for someone looking to cover their funeral costs or inheritance planning. 

In some circumstances, whole of life policies are reviewed every 10 years. This can result in the provider increasing the premium, or maintaining the premium and reducing the level of cover.

Single vs Joint life insurance

You can hold any of the above policy types as a single or joint life insurance policy. Couples have a choice between having separate policies, or one joint policy that covers them both.

With a single life insurance policy it covers just one person (but each person in a partnership can both have single policies).  The policyholder must choose who they want the payout to go to.  This differs from a joint policy, because if one person dies, the surviving partner still has their own life insurance cover.  Each individual policy can cover different amounts, making it easier to tailor to specific needs. 

With a joint policy, the payout is automatically given to the other policy holder. This policy will only pay out once, most commonly when the first partner passes away.  This leaves the surviving partner without insurance for the rest of their life.  A joint policy is generally cheaper than two single policies.

For example, if you had a joint life insurance policy and one person died, the remaining partner would have a lump sum of money to put towards their expenses – the mortgage, childcare, etc.  But if the surviving partner also died, there wouldn’t be an additional payout.  Single person life insurance policies might be more expensive, but we discuss the merits of both of you getting covered. 

Death-in-service life insurance 

This is offered by many employers as a benefit.  It usually pays out between three and four times your annual salary if you die when working for the company.  For example, if you earn £40,000 a year, the life insurance company could pay out a lump sum of between £120,000 and £160,000.  We can check if your work offers this and factor it into any decision you make on paying for your own life insurance policy.

How much life insurance cover do I need?

How much life insurance cover you need depends on your reasons for taking out a policy and what the money would be used for:

• Life cover is often used for mortgage repayments.  It is not a legal requirement but often a lender will require you to have a policy so that it knows the mortgage will be paid if you were to die.  If you want to cover your mortgage, the payout should be the same as what will be left on the mortgage loan.   

• If you want to provide your family with a regular income after your death, we could look at your current outgoings such as household bills, childcare costs or even university fees and future costs, to work out an accurate figure to get sufficient family life insurance.

• If you’re over 50 and want to cover your funeral costs, the amount might depend on what you can afford to pay in premiums.

How long should I get life insurance for?

A typical length of time for a life insurance policy is 20-25 years, although it could be shorter or longer depending on your reasons for getting it.

Here are some of the most common reasons for buying life insurance with an indication of how long you might need it for:

1. Life insurance to cover a mortgage – this should cover the remining length of your mortgage term.

2. Life insurance for financial dependents or family members – your policy should cover your family until they’re no longer financially dependent.  Usually this is until the youngest child turns 18, but it could be older if you want the policy to also cover university fees.

3. Life insurance for your whole life – whole-of-life insurance covers just that, your whole life.  This could be used if you want to be able to provide your family with a sum of money at any point when you die.

Does the level of life insurance cover change over time?

It’s possible to change your life insurance policy at any time.  You might need to increase, or decrease, the level of cover.  E.g., if you pay your mortgage off sooner than expected, you could lower the overall amount of cover.  Or if you move into a property with a bigger mortgage, you might want to increase the level of cover you have.  If you need to change your cover we can help by dealing with your insurer and establishing how much more, or less, it could cost you.  And we can check if you are best to stick with the same insurer, or if switching to a new one would offer a better deal.  

Should I consider getting life insurance written in trust?

If you put your life insurance in trust it means you’re setting up a formal arrangement for the policy to be looked after by the trust and trustees (people you decide upon, like family members or friends).

If it’s written in trust it doesn’t cost you anything, apart from any solicitor fees.

A policy written in trust is kept separate from your estate when it comes to inheritance tax.  This means your family might be able to get a payout with the least hassle and the lowest possible tax charge when you die.

It also means you can specifically state who you want the money to go to. This money should be divided up according to your will if you have one, or a letter of wishes if you’ve made one. If not it’s usually divided up according to the laws of intestacy, which may mean it doesn’t go to the people you want it to go to. Unmarried partners or those not in a civil partnership, for example, aren’t automatically entitled to this money.

How do I choose and buy life insurance?

We can help you shop around and find a policy that works for you, at the right price.  When you are happy with our choice, we’ll liaise with the insurer, who might need to look at your health and lifestyle to calculate how likely you are to make a claim on the policy.

How much does a life insurance policy cost?

The three main things that affect the price you pay for monthly premiums are:

1. The type of policy you want

2. The amount of cover you need

3. The length of time the policy will last for

But the following things also affect the cost:

• How old you are (the cost rises for buying a new policy as you get older)

• Your lifestyle, including your drinking and smoking habits

• Your health (the cost can be high for those with pre-existing conditions)

• Your family medical history

• Your job – the more hazardous, the higher your premiums are likely to be

• Where you live

The higher the risk of you dying and making a claim, the more expensive your monthly premiums will be.

For example, a healthy 30-something who exercises regularly and has no previous health conditions, will pay a lot less than a 50-year-old smoker with a heart condition. 

How confident should I be that my policy will pay out on my death?

Life insurance has one of the highest percentages of successful claims paid out for all types of insurance. 

According to 2021 figures from the Association of British Insurers:

• 98% of claims on life insurance were accepted

*source: https://www.abi.org.uk/news/news-articles/2022/05/payouts-for-bereavement-illness-and-injury-claims/

Does life insurance pay out for critical illness?

No, don’t assume that your life insurance policy will pay out if you get seriously unwell.  Critical illness cover is different to life insurance because it pays out when you are alive. A critical illness policy will pay out if you suffer from a serious illness or injury listed in the policy.  You can do what you want with the payout from critical illness cover.  You might want to pay off your mortgage or adapt your home.  You might be able to add critical illness cover as a bolt-on to your life insurance policy.  Bear in mind though that this will make your premiums more expensive.  The good news is we can help you with critical illness insurance cover too as part of getting all your financial planning on track.  

Considerations and Risks

·       Life Assurance plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.

·       Failure to disclose any requested or relevant information may adversely affect any future claims

·       The present tax free treatment of the policy benefits may change

·       If this policy is to replace any existing policy offering the same type / level of cover, you must not cancel any existing policy until the new policy is in force