Befuddled by life insurance? That’s not surprising. There’s so much terminology and so many different products available.
So, here’s our no-nonsense guide or 10 point Life Insurance Checklist to help you understand and choose the right type of life insurance for your situation.
1. Why should You Take Out Life Insurance?
Life insurance can pay your dependents money either as a lump sum or as regular monthly or annual payments if you die. You need it if:
- You’ve purchased a new home. So you want to make sure your partner or family will be able to cover the mortgage after your death.
- You have children or dependents. So you want the security of mind that they’ll be provided for if you’re no longer there.
- You want to leave a legacy. So you can help your surviving relatives with an inheritance after your death.
- You want to know your funeral costs are covered. So your family will not have to find an unexpected lump sum.
2. When shouldn’t You Take Out Life Insurance?
- You may not need it if you’ve already an employee package that includes ‘death in service’ benefits. This will cover you for a multiple of your salary.
But check the small print and see how much it actually provides. Also consider if you’re likely to change employer in your lifetime.
- You may not need it as a financial safety net if you’ve no dependents and are single. If you’ve no-one you’re responsible for and no-one to leave money to, life insurance’s not a necessity.
But, that said, it’s wise to remember that if you’re young and single, you don’t know what the future holds.
The cheapest time to buy life insurance is when you’re young. The earlier you buy, the lower the cost tends to be. This price can be fixed for the duration of the term.
So buying a policy now may well save you thousands of pounds in the future when a policy will cost you more.
3. How Much Life Insurance do You Need?
This might seem the trickiest part of choosing life insurance. It often helps to get independent advice.
Generally, you should aim to cover 10 times the main breadwinner’s income.
It’s wise too to factor in planned major outgoings. These could be future university costs for your children or outstanding debts. This includes your mortgage if you don’t already have a separate policy for this.
4. What Kind of Policy should You Choose?
Again, this is a confusing consideration. Basically, there are two types:
- Level term or Decreasing term life insurance policies. These run for a fixed period of time (known as the ‘term’ of your policy) such as 10 or 25 years. These pay out if you die during the policy term. There’s no lump sum payable at the end of the policy term if you don’t die or die outside the term period.
- A whole-of-life policy. These pay out no matter when you die, as long as you keep up with your premium payments.
5. How Long should the Term Be?
To decide this, look at your situation.
- As a general rule, a policy with children’s needs at its heart should last until they’re no longer dependent. For most of us, it’s until they finish full-time education or a few years after.
- If you’ve a partner you want to protect, then aim to set the term for at least until they reach pensionable age.
6. How can I reduce the Policy Premiums?
The cost of cover increases with the likelihood of death. Your age, state of health, having a dangerous job or being a smoker will affect the price you’re offered.
Never be tempted, though, to hide any detail about your health or life. Your insurer may use ‘non-disclosure’ as a reason not to pay out in full.
If you do have a pre-existing medical condition, then taking independent advice is recommended. Every insurer has different rules.
7. Can I Fix the Premium Payments?
You can, and for budgeting security, it’s sensible.
Level or decreasing term cover is the most popular and simplest type of life insurance. With this, you can choose between paying one of two premium (monthly insurance payment) choices. These can be ‘guaranteed’ or ‘reviewable’.
- If your premiums are guaranteed, your insurer will never raise the price. So you’ll have the peace of mind of knowing they won’t change throughout the policy term.
- If you choose a reviewable premium, the costs will be less at the term start. Your insurer, however, can increase these in time.
8. Will My Dependents Face an Inheritance Tax Bill on Payout?
No, but the payout will be considered a part of your estate. If your total assets are over the inheritance tax (IHT) threshold of £325,000, then your dependents would have to pay 40% IHT on the sum.
Fortunately, you can avoid IHT by placing the policy into trust. Most insurers will automatically provide you with the paperwork to do this simply when you take out a new policy.
If you write in trust the insurance pays out directly to your dependants. So it never becomes part of your estate, which avoids inheritance tax and speeds up the payout.
Do you need more information on the life insurance explanations here? Or would you like talk over your circumstances to help you choose the right life insurance product?