Your Guide To Life Insurance

What are the different types of life insurance, do you need it and how much does it cost?

Life insurance. It’s not the most fun or exciting of topics, to say the least. But if you don’t take a few minutes to consider whether you need life insurance now, while you’re alive, then one thing’s for sure: it will be too late once you’re dead.

Of course, not everyone should get it – because not everyone needs it. And even if you do need it, you should be wary of taking out a policy which is not right for your individual needs and circumstances.

That’s where lovemoney.com can help. Here is a quick guide to everything you need to know.

Do you need life insurance?

The answer to this question depends, ironically, on whether anyone depends on you.

For example, if you have children, then yes, you probably do need life insurance – because they depend on you financially. This is the case even if you don’t work and instead are the unpaid nanny/cleaner/chauffeur/cook/secretary/superhero of the household. If you want to protect your contribution to your family’s finances in the event of your death, you need life insurance.

And children aren’t the only dependents you need to think about. If you don’t have children, but you do have a joint mortgage, and your partner could not meet the monthly payments on his/her salary alone, then again, life insurance is probably a good idea. Otherwise your beloved could be turfed out by the mortgage lender after your death, and – if the property is worth less than the mortgage – pursued for the rest of the debt. Not a pleasant thought.

Similarly, if you support or look after someone financially in any way, be it a friend or relative, then you should consider taking out life insurance to protect them should the worst happen to you.

Types of life insurance

There are three key types of life insurance:

1) Level Term Assurance. If you want your dependents to receive a lump sum payout, this type of life insurance will suit you best. It pays out a set amount, which stays level no matter how long you hold the policy. The premiums on this policy are likely to be higher than on policies which offer Decreasing Term Assurance.

2) Decreasing Term Assurance. With this type of insurance, your level of protection decreases as time goes by. It is best suited to mortgage borrowers on repayment deals who are only concerned about ensuring their mortgage will be paid off in the event of their death. This is because, as you pay off your mortgage every month, your debt to the lender decreases. So, each month, you need less cover as there is less debt to pay.

Remember, this is only for borrowers on repayment mortgage deals. If you’re on an interest-only mortgage deal, decreasing term assurance would not suit you, as you instead of gradually chipping away at your debt each month, you’re only paying the interest on that debt - and therefore the size of your debt stays the same. That means your level of protection needs to stay the same, too.

Similarly, if you want your policy to do more than pay off your mortgage – if you want to ensure your dependents receive a lump sum on top, for example – then a policy with level term assurance may be a better option.

Just be aware that the greater your level of protection, the more expensive your premiums will be.

3) Family Income Benefit. This is a useful type of life insurance if you want to protect your household income, especially if you are the sole breadwinner in the family.

Instead of paying out a lump sum when you die or paying off your mortgage, family income benefit will provide your family with an annual income until a specified point in time – for example, until your youngest child turns 18.

You can take out this type of benefit alongside a life insurance policy. So, for example, you could take out a policy with decreasing term assurance that will pay off your mortgage, plus family income benefit to provide your family with an annual income.

Usually, family income benefit is cheaper than level term assurance, although this can vary depending on the policy provider.

Tax

There are complex tax issues around life insurance policies which I won’t go into here – suffice to say, the payout from your policy could be liable to Inheritance Tax, but that you can minimise this by putting the policy ‘in trust’. To find out more, speak to an accountant or independent financial adviser who specialises in inheritance tax planning.

Premiums can vary

As always with insurance, the size of your premiums will vary from provider to provider. This is because different insurers have different underwriting criteria, so it’s worth comparing lots of different policies to figure out which is the cheapest.

The cost of life insurance can also vary depending on your individual circumstances. Generally, factors which affect the price of your premiums are factors which affect your life expectancy. If you smoke, for example, your life expectancy is lower and therefore you may be charged higher premiums. That’s why, if you stop smoking, it’s worth reviewing your protection after a year of being a non-smoker, as you may be able to get cheaper cover.

Finally, always read the small print. You never know what nasty get-out clauses your policy may contain…

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