6.5 things you didn't know about this essential cover

We all know that life insurance is essential if you have a mortgage to pay or a family that depends on you, but here are 6.5 things you may not know about life cover...

Prince William and Kate Middleton are set to sing an Abba medley on the X Factor along with Ant and Dec and the entire cast of Strictly Come Dancing!!

Right, obviously the statement above is not true, but now that I have your attention I want to talk about life insurance! Yes, I know it’s not as exciting as royal weddings and reality TV...but it’s infinitely more important.

Here at lovemoney.com we’re always trying to ensure that those people who need a life insurance policy actually take one out. After all, what would happen if you were no longer around to bring in an income? How would your family cope?

But all you wise people know about that anyway, so here’s 6.5 things you may not know about life insurance...

Life insurance can help you avoid inheritance tax

If you die with possessions and savings totalling over £325,000, then it’s likely that you’ll be hit with a whopping 40% rate of inheritance tax (IHT) levied on the chunk of your estate that exceeds this threshold.

Married couples or civil partners have a combined threshold of £650,000 as gifts between spouses are tax fee. So when the second partner dies any combined assets over the £650,000 mark are taxed at 40%.

But whole of life insurance – a policy that runs throughout the lifetime of the holder - can be used to offset this tax. The premiums will be higher as a claim is guaranteed, but if you calculate how much IHT you will be subject to and then take out a policy for this amount, your life insurance pay out with wipe out the IHT bill.

If you are planning to do this, make sure the life insurance plan is set up in trust and is payable direct to your children or another family member. This will ensure that the payout is not counted as part of your estate, and hence IHT will not apply to it.

You can find out more about IHT by reading Avoid paying inheritance tax.

John Fitzsimons looks at three simple ways to cut the amount you spend on your life insurance.

Your policy may pay for itself if you can’t

If you're unable to work due to illness or injury, and can’t therefore pay your life insurance premiums, you may not necessarily have to cancel the policy. Many insurers are now providing waivers that can be added to any policy which guarantee that your premiums are met if you’re unable to work for 26 weeks.

These are usually payable until the policy ends or a claim is made – but it’s worth noting that they do not cover unemployment or redundancy.

Your policy may pay out if you are diagnosed with a serious illness

Most life insurance providers will now provide the option to purchase additional cover that will pay out if you are diagnosed with a serious disease. This cash sum is designed to help you and your family cope with the inevitable financial implications of a critical illness.

But if you are considering taking out this form of cover it’s a good idea to check exactly what is covered, as what constitutes a critical illness may vary between providers and change with medical advances.

Joint cover is not always a good idea

Joint life insurance may look cheaper to pay and seem easier to take out, but it isn’t always. Joint cover is usually taken out on a first death basis – meaning that it will pay out when the first partner dies. This will mean that the surviving partner will have to take out a new policy, but finding an affordable plan could be difficult as it’s likely that their increased age will push up premiums.

Jane Baker explains why life insurance should be your number one financial priority

Life insurance doesn’t always have to pay out a lump sum

Most life insurance pays out a set lump sum when you pass away. But if you take out a larger policy you may want to consider Family Income Benefit. This allows the lump sum payment to be given to your family in regular, tax free instalments.

Read more about this form of insurance in Save 35% on your life insurance!

You may be able to convert term life cover into permanent cover

If you decide to take out a fixed term life insurance policy that will last you into later life it may be worthwhile taking a look at convertible cover. A convertible policy allows you to, as the name suggests, convert the plan into whole of life cover and continue paying the same premiums, usually without a medical check.

The best idea is to check the rates for a new policy – if the premiums are higher than they would be if you converted an old policy, then it makes sense to stick. You can get a quote quickly at the lovemoney.com life insurance centre.

Life insurance is not very expensive at all!

Ok, I’ve only put this as half a ‘thing’ as you probably know it already – after all we’re always banging on about how life insurance is such great value. But that doesn't stop it being true! You can insure your life, and protect the financial future of your family, for just a few pounds every month, well worth it in my book.

You can find full life insurance rate tables at Switch your life insurance policy – quick or read about how to make sure you get the right type of cover at The worst mistake of your life.

More: The most important reason to take out life insurance 5 people who need life cover