What does life insurance cover?
Life insurance basically pays out on death. It’s intended to help to provide for your loved ones when they can no longer rely on your income. The pay-out can be used to clear any outstanding debts, such as a mortgage, or to cover everyday expenses. It can even pay for the funeral.
Should I bother with life insurance?
If you are single with no dependents, you probably don’t need to worry too much about life insurance. But if you have a partner who would struggle to cope financially after your death, or if you have children, then life insurance can offer a financial lifeline.
Can I get life insurance through my employer?
Your employer might offer something called death-in-service benefit, which normally pays a lump sum of four times your annual salary if you die while still employed by the firm. It can be a valuable benefit, but you might need to take out additional cover depending on your needs.
What is term insurance?
Term insurance is the most common type of life insurance and pays out only if you die within the term. For example, you might take out a 25-year policy so your family could claim if you were to die within 25 years. Of course, if you died later, there would be no payout.
Your occupation, hobbies, and other lifestyle factors such as your weight and fitness also help to determine the cost of cover
Does the payout stay the same no matter when you die?
If you buy level term insurance, the pay-out is the same whether you die in year one or year 25. An alternative is decreasing term insurance, where the pay-out gradually gets smaller over the term.
For example, the policy might pay out £100,000 if you died in year one, but only £1,000 if you died in year 25. Decreasing term insurance is often linked to a repayment mortgage because the amount you owe the lender also reduces over time.
Another option is family income benefit, which pays a monthly income from the time a claim is made to the end of the policy term. This is cheaper than level or decreasing term insurance.
How do I decide the length of the term?
It’s really up to you. You might want to make sure the life policy lasts as long as your mortgage. Or maybe you would prefer to link the term to the age of your children so that it does not expire until they reach 18, or perhaps when they have finished university. Your own age will also have an impact on your decision.
Can I buy life insurance that will pay out whenever I die?
Yes. If you want to be confident that your family will be able to claim no matter when you die, you can take out whole of life assurance. You are not then restricted by any policy term. It is, however, worth bearing in mind that whole of life assurance is usually more expensive than term insurance.
Are life insurance premiums fixed?
Premiums for level and decreasing term insurance and family income benefit policies are usually ‘guaranteed’. In other words they are fixed throughout the policy term. However, you need to check the small print as some firms offer ‘reviewable’ premiums, which are reviewed every five or 10 years and usually go up.
Whole of life assurance is different because the policy is typically linked to an investment – and if the investment does not perform well, the insurer is entitled to increase the premiums.
How much life insurance do I need?
The amount of cover – known as the sum insured – depends largely on your personal circumstances. For example, if you have a big mortgage and a large family, you will need more cover than someone who has a small home loan and one child.
Most often recommend a sum assured equivalent to 10 times your annual income, though you should carry out more detailed calculations to make sure you are properly covered.
How much does life insurance cost?
Premiums vary according to the type of policy and the size of the sum insured. Insurers also take into account the risk of a claim when setting premiums. So, life insurance is more expensive for older people. Similarly, a customer in a poor state of health can expect to pay a higher premium.
Your occupation, hobbies, and other lifestyle factors such as your weight and fitness also help to determine the cost of cover. Insurers even look at your postcode as people in some areas of the country are statistically more likely to claim.
I am already ill. Can I still take out life insurance?
It can be tricky to find affordable life insurance if you have a pre-existing medical condition, especially if it’s serious. Some insurers will turn you down flat; others will exclude the condition. For example, if you have diabetes, the policy would not pay out if you were to die from the disease. You would, however, be covered if your death was not related to your condition.
There are a number of specialist insurers that offer life cover to people with pre-existing conditions, but you should be prepared to pay a higher price because of the higher risk of a claim.
Can older people buy life insurance?
Life insurance premiums rise with age, so older people will almost certainly pay more for cover. However, it is still possible to take out life insurance when you are in your 50s. Some firms even accept the over 50s without any medical or health questions.
Can I insure my partner?
Many couples take out joint life insurance so they only have to deal with one set of documents. The premiums for joint life cover can also be cheaper than for two single life policies. However, it’s worth bearing in mind that joint life insurance pays out only once, on the first death. If the surviving partner then wants to arrange their own life cover, it will be more expensive as he or she will be older and possibly in a poorer state of health.
Can the policy pay out a regular income rather than a lump sum?
Yes. If you opt for family income benefit, your beneficiaries will receive a regular income on your death. It’s often easier to manage a regular income than a lump sum because you don’t need to worry about investing the money or any management fees. As noted, premiums are also typically cheaper because the longer you live, the less the insurer has to pay.
For example, if you took out family income benefit to provide a regular income of £30,000 a year for 20 years and died in year two, the insurer would have to pay £30,000 a year for 18 years. But if you died in year 18, it would only have to pay the income for two years.
Will my family have to pay tax on any life insurance payout?
The proceeds of any life insurance policy are free from income and capital gains tax, but they are potentially liable for inheritance tax (IHT). However, it’s easy to sidestep IHT by writing the life policy ‘in trust’. It will then go directly to the beneficiaries and will not form part of your estate when you die. Find out more here.
Can I make changes to my policy?
You can usually make amendments to your policy, though it might result in a higher premium. You should also keep your insurer up to date with any changes to your circumstances, otherwise you could invalidate the cover. It’s a good idea regularly to review your life insurance to make sure that it continues to meet your needs, particularly if you get married, move house, or have a baby.
Are there any common exclusions?
Always read the small print of any life insurance policy so that you understand the level of cover and the exclusions. Many insurers will not pay out if you die as a result of alcohol or drug abuse or suicide. It is also difficult to get cover for a pre-existing medical condition, or if you die as a result of a dangerous sport or hobby.
What is critical illness cover?
Critical illness insurance pays out a tax-free lump sum if you are diagnosed with one of a list of serious conditions during the policy term. Insurers commonly offer critical illness alongside life insurance and it can be cheaper to take out combined cover. However, you should be aware that a combined policy usually pays out only once. So, if you claim on the diagnosis of a critical condition, you will not be able to claim again when you die.
Are there any other policy add-ons?
You can add ‘terminal illness’ cover to most life insurance plans. You would then receive the payout if you were diagnosed with a terminal illness. ‘Waiver of premium’ is another common add-on and pays the premiums on your behalf if you cannot work due to illness or injury.
How do I cut the cost of life insurance?
Older people pay more for life insurance so it makes financial sense to arrange cover as early as possible – in your 20s or 30s rather than your 40s or 50s. You can also help to lower premiums by improving your health and lifestyle. So, give up smoking, lose weight and head to the gym!
Another money saving tip is to shop around. Premiums vary from insurer to insurer so you can often save money if you compare prices. It’s easy, too, with MoneySuperMarket’s free independent comparison service. We can help you get a great deal on your life insurance in a matter of minutes.