What is Life Insurance and how to make sure that you are getting what you and your family need.
There are two types of Life insurance; ‘Term’ and ‘Whole of Life’ and these are distinctly different.
Term insurance is the one that most people are offered and know about, it is therefore the most popular. It pays out a lump sum or a regular income to your beneficiaries if you die within the term time of your policy.
Whole of Life Assurance – note the distinction between ‘insurance’ and ‘assurance’ here. Insurance means you are taking out a plan to help you against something that might happen during a certain time, however ‘assurance’ means that it doesn’t matter when you may die, your beneficiaries will be guaranteed to get the money that you have paid out.
So, Whole of Life Assurance is a policy that is paid for right up until death no matter when it happens, there is no fixed term.
The important detail to note about the difference is that if you are still alive at the end of a ‘Term’ policy your plan has no cash-in value, so you will not get any return on your premiums. In short you won’t see a penny of your hard earned cash. So, it is important to take good advice when you look at taking out life insurance in general.
Even though whole of life assurances are intended to stay in place for the rest of the policy holder’s life, it doesn’t mean that you have to keep paying until you die, there are some policies that allow you to stop paying in once you reach a certain age, but still guarantee payment at death.
There are other benefits to a whole of life policy, for example for specific illness or disability. Also there are other good uses for choosing whole of life policy, such as:
- Providing your loved ones with a lump sum to pay for your funeral. The average cost of funerals increases year on year. With a whole of life policy, you can ensure that this cost is covered completely when you
- Providing a lump sum to pay an inheritance tax bill. This can mean in the worse cases that the family home does not have to be sold to provide the money required to pay inheritance tax. The tax is currently at 40% and is charged on all estate assets above
£325,000 for a single person. If you write your policy under ‘trust’, your beneficiaries should receive a lump sum which they can use to pay the Inheritance tax bill without losing the family home. Tax planning is challenging and the rules change regularly, so it is worth getting specialist advice about this.
It is also important to note that there is a higher cost that goes with whole of life insurance because there will always be a pay-out. You should therefore compare prices and types of policy carefully as for some you could be paying for it well into your 80’s.
There are three types of policies available:
Non reviewable
This is where you choose how much you wish to be covered for. Your broker will tell you how much you need to pay in to provide that final sum. This cost is either made in a one off payment or regular premiums for the rest of your life. No matter what happens, your broker will not request any further payments or an increase in your premiums. Your policy can be linked to an investment or not, it’s your choice.
Limited Payment Term
You choose how much you wish to be covered for. You then pay regular premiums to the broker for a set term, this is normally to a set age such as 65. After this point you do not pay any more into the policy and the policy sits in place until death. The sum assured is fixed at the time of the last payment and usually cannot be altered after this. So if you live for another 20 years the policy will not increase and there could be a risk of shortfall.
Reviewable or Investment linked
This is the most popular policy. You choose how much you wish to be covered for as usual. Then you pay either a lump sum or in most cases regular monthly premiums to your provider.
The difference in this case is that part of the premium is used to build up an investment fund. So, the premium that you have to pay and the final sum you have agreed is arranged on the basis of certain assumptions about what will happen in the future. The assumptions being how well the investment fund could perform and the costs of providing the cover.
Your money will be invested into a fund which contains a mixture of stocks, shares, property or cash bonds, and the proceeds go towards your sum assured. There are reviews with this policy, as things can happen and the fund is not working as well as it could be, so your broker may ask for an increase in your premium payments or that you reduce your sum assured.
Many policies offer a choice about how much of your monthly payment goes towards your life assurance and how much goes into your investment fund or savings pot if you prefer to call it that. The difference will usually be reflected in the sum assured, so for example, if you want a high amount of life cover with a small investment, then you choose what is called, the maximum option. Your broker will be able to explain this to you.
What to consider about life insurance
Many insurance tell you that they won’t increase your premiums or sum assured for the first 10 years of the policy. When you get to this point, they will review your plan and possibly push up your payments. Make sure you understand what can happen and whether your premiums will be reviewed after a period of time so that you can be prepared.
How much you pay will depend on the final sum assured that you wish to have, your age, gender, health and how much you drink or smoke. The higher a risk you are classed as being, the higher your premium. Women pay slightly less because they generally live longer than men. Remember your insurer does not want to make a payout after a short time, so they prefer you to be in reasonably good health.
What if you want to end the policy?
You can end a whole of life policy early, but beware there can be high charges and you will get back less than you invested.
Also, it could be difficult to open a new one later on, as they get more expensive the older you become and if you have developed health problems in that time, this can make it even harder.
In summary, it is important to look at your life situation when you are planning on taking out life insurance so that you are taking out the right policy and if necessary seek advice from a professional who can help you make the right decision for you and your family’s needs.