Life insurance is the type of cover nobody wants to think about! But no one should avoid having it if they’ve children or dependants that rely upon them.
If the unthinkable were to happen, not having life insurance could mean you’d leave a sad legacy. Such as your family being left without any financial support. Or, worse still, trapped in debt.
So here’s our step-by-step guide to help you get the right and best-value policy for your circumstances.
Step 1. Decide if You Need Life Insurance at All.
Are you a main earner with dependants but without a huge pot of savings? Then life insurance is crucial to safeguard their futures. The fact is one in 29 children will lose a parent before they reach the age of 18.
Are your children grown up? And you’ve enough back-up funds – such as money put by, assets, and income streams – to support yourself and your spouse or partner? Then it may not be worth shelling out for.
Do you have life insurance as an employee benefit? You may think you’re covered. But read the small print. What’s usually provided by employers is death-in-service cover. This pays out a tax-free lump sum if you’re employed by the company at the time of your death. The pay out, though, is usually only between two and four times your annual salary. So consider a top-up policy.
Step 2. What Type of Life Insurance should You Choose?
The main purpose of life insurance is to replace the future income of a primary breadwinner.
So we’ll be looking here at life insurance as opposed to life assurance plans. These are more akin to investment saving vehicles. Basically, there’s three types of cover.
- Level term Life Insurance. This policy is one you buy to cover your family for a fixed period of time. It’s known as the ‘term’ of your policy and is usually five, 10 or 25 years. The term is normally until the age at which you believe your children will be self-sufficient. These policies only pay out if you die during the policy. There’s no lump sum that you get at the end of the policy term.
- Mortgage decreasing-term Life Insurance. This is a policy you usually buy to clear your mortgage in the event of your death. Some lenders insist on your having this, especially if it’s a joint mortgage.
- Whole-of-life insurance. This policy is one that will pay out no matter when you die, as long as you maintain your premium payments. This kind is often bought to reduce inheritance tax obligations.
Step 3. What’s the Cheapest Practical Policy to Buy?
Most people find that level term life insurance will fulfil their needs for peace of mind and enough cover. With this, you’ll pay a premium each month, having agreed the pay out amount. For example your family might receive £350,000 if you die within the next 30 years. You’ll pay more according to the amount of cover and the length of time you insure your life for.
You can also opt for index-linked term life insurance. Premiums for this kind of policy are a little higher as they rise in line with the Retail Prices Index measure of inflation. But you get to be sure that the sum insured maintains its real value throughout the term.
Step 4. Work Out the Sum Your Family would Need.
Aim for a lump sum that’s enough to repay any outstanding debts. Make sure you include your mortgage if you don’t have a separate policy.
Estimate the outgoings your dependants will have ahead. This might be childcare, school fees, future university and higher education costs. Most financial experts say the least you should take out is ten times your annual income.
Many life insurance companies offer online calculators. You can use these to help you decide the lump sum that’s best for your circumstances.
Step 4. Look at How You can Lower the Cost of Your Premiums.
- Take out the policy as early as you can. As we age, the probability of dying becomes greater.The premium amount usually increases about 8% to 10% for every year of age. So there’s a big difference between taking out your policy in your 20s and your 40s.
Your annual premium for your term life insurance policy will be decided at the time of purchase. Then it will be set at this throughout the policy.
Opt for a family income benefit policy. This will pay out a monthly income of the amount you set each month from the date of the claim to the end of the policy term. So you need to do your sums for this and establish exactly how much your family would need on a monthly basis.
This kind of policy is cheaper as the insurer would in total pay out less than with a fixed lump sum level term insurance plan. But be aware that this type of policy would not enable your family to clear a large debt such as a mortgage in one go.
- See if you can pay annually, rather than monthly. Most insurers offer a discount on annual premiums.
- Stop smoking. Smokers pay more for life insurance because of the health risks that come with the habit. Insurers take the risks posed by smoking seriously. Premiums can cost a third more for a 30-year-old smoker. They can be double for a smoker aged 50.
Don’t be tempted to lie. Many insurers will make you undergo a Cotinine test when you take out your policy. This detects traces of nicotine in your urine, saliva and blood. If you contract a smoking-related illness, insurers will look into your medical history. Remember, too, if you do give up, to let your insurer know as they may well adjust your premium. You need to have stopped for at least 12 months for this.
- Be as healthy as you can. You will be questioned about your lifestyle when you apply. Your BMI will be taken into account too. Se being fit and active will have a positive impact on the cost of your life insurance premiums.
Step 5. Have Your New Life Insurance Policy Written in Trust
It’s essential you do this to protect your family from inheritance tax and it’s easy to do. Most life insurance companies will automatically supply you the forms to do so.
Why should you do it? A trust guarantees that the policy proceeds will be paid fast and without any inheritance tax dues. This is because a life insurance policy payout would otherwise form part of your estate. So it would be liable for inheritance tax. But if you write it ‘in trust’ to your dependants, it gets paid directly to them so inheritance tax isn’t due.
. 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?