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Life Insurance Guide
All term life insurance policies require the proposer to make payments for a specific amount of time. In return, the insurance company promises to pay your beneficiaries or your estate the benefits payable under the policy should you either die or become terminally ill or alternatively be diagnosed with one of the terminal illnesses under the terms of the plan.
The Need for Life Insurance
For most people the overall objective of life insurance is to maintain standards of living for their dependents on the event of their death.
Unfortunately the need for life insurance is overlooked by many people, can you believe that two out of three people in Britain have no life insurance cover other than the cover they may have in place to cover their mortgage.
Life insurance is a simple means by which you can plan for the future, giving you peace of mind that your family will be provided for and will be able to retain a degree of financially security after your death.
The main decisions you have to make before considering taking out life insurance are:
1. Whether you need life cover.
2. What type of cover is most suited to your needs?
3. How much life cover you need.
Do I need life insurance?
Clearly the ability to earn an income can be considered your own and your family's most valuable asset this is because your income allows you to obtain other assets. However, as we are all aware, the ability to earn an income is not always guaranteed. The need for an income will have to be met in respect of those family members who were financially dependent upon you and will continue to be after your demise. The need for you to hold life insurance - and for an adequate amount - will always depend upon your personal and financial circumstances. Ask yourself the following questions and if any of these apply to you, then you probably need to consider your life insurance needs:
Which Policy do you need?
Do you have a repayment mortgage or other loan? If so then to protect a repayment mortgage or other type of loan you would need to consider Decreasing Term Assurance which is a policy where the cover reduces in line with the balance outstanding on your mortgage and cover would normally end when the mortgage is finally repaid.
Do you have an interest only mortgage or other loan where only interest payments are being met? If so then you would need to consider Level Term Assurance, which is where the cover will remain constant throughout the term and again the policy would normally end when the mortgage is finally repaid.
Do you want to arrange protection for your dependants? If so then again we would normally recommend Level Term Assurance, where the cover will remain constant throughout the term and would normally expire at a set age or when your dependants reach an age of non-dependency.
How much do I need?
Everyone's circumstances vary, but you should consider life insurance if you have any of the following 'outgoings':
Before committing yourself to taking out any life insurance plans we would always suggest you check your employment benefits at work as several employers include life insurance as part of your employment package.
In addition to this then if you are a current member of any company pension scheme some employers provide a pension and/or lump sum for your family after your death. This is always worth exploring and for you to evaluate whether these monies will be enough, if they are not, or if you would feel happier providing your family with a little extra then a further policy would be worth considering.
What we are currently seeing is that where employers are actually taking steps to reduce their pension contributions and liabilities, resulting in the scheme changing from a final salary basis to a money purchase arrangement, as part of this trade off several employers are increasing the amount of benefit payable as death in service life insurance some are even providing as much as 10 times salary. Again evaluating this is or should be your first port of call.
A word of caution here when it comes to relying on your employer to provide all of your life insurance benefits as no doubt people will change jobs and thereby lose these benefits, alternatively you may find yourself having left employment due to health reasons and hence may be unable to take out a separate plan to replace any life cover you may have lost.
Type of term policy
There are varying versions of term insurance policies. With a level term policy the benefit is paid on death and remains the same throughout the term. At the end of the term the policy has no value and simply expires.
With decreasing term insurance, the benefit payable on death reduces each year until it is virtually zero by the end of the policy's term. The premiums on these policies are cheaper than for level term insurance.
Life Assurance Frequently Asked Questions
What factors will affect the premium I pay?
premiums are always based on the life assured's age next birthday, the amount of cover required, if they are a smoker or non smoker, the term and type of the policy. Each of these will affect the price you pay.
What is the definition of a non-smoker?
This definition of a non smoker usually means that you have not used any form of tobacco in the last 12 months. Most companies will offer cheaper rates for non smokers.
Will I need a medical?
The majority of life insurance applications do not require the life assured to have a medical, should there be a need for one then the insurance company will arrange and pay for it.
What is Critical Illness Insurance?
Critical illness insurance policies will pay out a tax-free lump sum if you suffer a 'Critical Illness' such as a Heart Attack, Stroke, Cancer, Multiple Sclerosis and many others.
What is Terminal Illness Benefit?
The insurance is paid out before your death if you are suffering from a Terminal Illness.
What is Waiver of Premium?
Should you be unable to work due to ill health or disability then the insurance company will normally pay the premiums on your policy.
Can two people have a policy together?
Yes, two people can usually take out the plan. You can even specify if you want the plan to pay the benefits on the first death or second death.
Can I take the plan out on the life of another person?
Yes, provided you can demonstrate you will suffer a definable financial loss if that person dies. This is referred to as having an 'insurable interest'.
Are children covered?
Children are also generally covered for Critical Illness until a certain age. Most insurers will pay for a child claim up to 50% of the Critical Illness Benefit sum insured.
What is the difference between Guaranteed and Renewable premiums?
A Guaranteed premium is guaranteed not to be increased during the term of the policy. A Renewable premium could go up or down depending on the number of claims the insurance company receives.
Will my policy have a surrender value?
In order to keep premiums down, then most term and critical illness policies do not have or accrue any investment or surrender values.
I am not in good health; will I be accepted for cover?
This depends on the type of cover you want and your state of health. It is often worth trying, as you do not have to go ahead if the insurance company do not offer their normal terms.
How are the premiums paid?
All premiums for term insurance are paid directly to the insurance company.
Can I cancel my application?
Yes, just let the insurer know.
Can I cancel my policy after it has started?
You have the right to cancel your policy within 30 days of it starting. There is no penalty for cancellation of a policy.
Writing Your Policy in Trust
Taking out a life insurance plan can guarantee a large and welcome payout for your family in the event of your death. Placing your policy within an appropriate trust ensures swift and straightforward payment to your dependants which can avoid lengthy delays.
When a trust is not appropriate
Where the policy is to be assigned to a third party as security for a mortgage or other loan. This is why a joint life first death plan should not normally be put in trust.
Is there any cost to write a policy in trust?
How do I arrange a suitable trust?
Your life insurance application form will ask if you wish to register your plan under a trust. The insurance company will send you a trust deed form.
Are there any disadvantages to writing a policy in trust?
The answer is generally no, as setting up a policy in trust is seen as a safeguard to make sure that your beneficiaries receive any monies due quickly and without incurring a tax bill.