Life Insurance can provide financial security for your loved ones if you pass away.
The financial burden of losing a loved one can be devastating on a family and Life Insurance can help ease this pressure by ensuring the family doesn’t have any financial worries.
Typically, Life Insurance is taken out for two main reasons:
There are different types of Life Insurance cover, for different needs
The sum assured stays the same throughout the chosen term, giving the reassurance of knowing exactly how much will be paid out regardless of when a successful claim occurs within the policy period.
This is typically taken out to provide a family with a set level of financial security to cover general lifestyle costs.
With decreasing cover the sum assured reduces throughout the term of the policy. This is primarily arranged to pay off a repayment mortgage.
As a mortgage reduces throughout the term the life insurance sum assured decreases roughly inline with the debt. Because the amount of cover provided by the insurer decreases over the policy term, the premiums for decreasing cover are usually lower than for level cover.
An increasing term policy is effectively level cover with an option to have the sum assured index-linked, meaning that it will increase throughout the policy term. This is primarily arranged to ensure that the cover amount is not eroded by the effects of inflation.
Unlike with term insurance policies, Whole Of Life cover does not expire after a fixed term and will pay out at your eventual death, whenever that may be, provided you keep paying the premiums.
It’s typically used to mitigate an inheritance tax liability and to cover funeral costs.
This type of policy pays a monthly or annual income instead of a lump sum to your family for the remainder of the policy term in the event of death to provide dependents with ongoing financial security.
Ideally, Family Income Benefit should be arranged on an index linked basis to ensure the pay-out keeps pace over time with inflation.
How much does life insurance cost?
The cost of Life Insurance is very much dependent on the amount of cover taken but will also be affected by factors like your age, health and medical history, whether you smoke or vape and also if you enjoy hazardous leisure pursuits.
What if I smoke?
The inherent risks involved with smoking mean that smokers pay more for life insurance and insurance companies class anyone who has smoked in the last 12 months as a smoker. Likewise, people using nicotine replacements will also be classed as a smoker by the major insurers.
The majority of insurers also class vapers as smokers, this is mainly because vaping contains nicotine and it has not been around long enough for insurers to fully assess the long term effects.
Don’t ever be tempted to hide that you have smoked or vaped within the last 12 months, quite simply your policy will be invalid and will not pay out as desired.
What if I have an adverse medical history?
Insurance premiums are also based on a person’s health and the majority of insurers will ask for a detailed history of your medical past. Most minor things will not effect the cost of Life Insurance but major conditions could mean the insurance premium will rise, exclusions could be placed on the policy or potentially that they even refuse to provide the cover.
Different insurers have different underwriting criteria and they will not all look at your circumstances in the same way so taking impartial advice from experienced brokers is essential if you have unfortunately suffered ill health.
What if I enjoy hazardous leisure activities?
Insurers need to know if you partake in any hazardous leisure activities, for example: scuba diving, rock climbing, sailing, flying light aircraft or sky diving. Depending on the activity and how often you do it can affect your premium or the likelihood of getting the cover.
Will my premiums change?
Most term insurance policies are arranged on a guaranteed premium basis meaning that your premiums will stay the same over the policy term. This is often not the case with Whole of Life policies and with Indexed Linked cover where the premiums will rise to reflect the higher sum assured.
Care must be taken as many insurers also offer ‘reviewable’ premiums that will typically rise throughout the policy term, usually every five years.
Is the pay-out taxed?
Pay-outs from Life Insurance are exempt from Income Tax or Capital Gains Tax, although they are subject to a potential inheritance tax liability. This can be mitigated by writing the insurance policy in Trust, which removes the proceeds from the deceased’s estate. Speak to our advisers to understand the full benefits of writing a Life Insurance policy in Trust.
Sole or Joint Life policy?
A Joint Life policy is typically cheaper because if will only pay out once, usually on a first death basis and will often be arranged to cover a joint mortgage. However, there are potential pitfalls, if the survivor still wants cover they will need to take out a new policy, when they are older which will mean higher premiums and they may have suffered some ill health which could make getting the cover harder or costlier still.
Taking Single Life policies is often more cost effective as the difference in premium is often marginal and you effectively get twice the amount of cover for very little difference in price. Having individual policies is usually advisable if you have children and want to maximise the potential security for your family
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