Life insurance is a type of protection insurance that can provide a payment to your estate – or to a trust you can set up – after your death.
Policies can come in many different forms, but there should be options available for most adults. The broadest distinction in policies tends to be between:
Term life insurance
A form of life cover which will protect you for a set period of time, often used to protect a mortgage given a mortgage is often limited to 25-30 years.
Whole of life insurance
Whole of life insurance covers you indefinitely so long as you continue to pay your premiums.
Different types of policies can be used to cover different things, but common reasons for taking out life insurance are to ensure children have the financial security to help them reach adult life and/or to ensure a mortgage can be cleared in the event of the policyholder’s death.
The size of the payout you could receive from life insurance isn’t tied to your income; you can, effectively, arrange cover for any sum you choose.
What life insurance is not…
It’s important to be aware that life insurance isn’t a savings or investment product.
You won’t get any return on your premium payments if you’re still alive at the end of a term policy, and a payout on a whole of life policy may be less than the sum of premium payments you made during your lifetime.
There’s also no cash-in value, meaning that if you stop premium payments before the agreed time your cover is likely to lapse.
“Many people would associate taking out a life insurance policy with protecting a mortgage and may feel that if their mortgage is paid off then their family is going to be secure.
Living mortgage free is certainly a bonus, but if you’re leaving behind a spouse, partner or children, they may still require further financial support, especially if you were the main bread winner.”
Independent Protection Expert
Considering your employer funded life insurance…
When considering the level of protection you want to take out, remember that you may have group life insurance as part of the benefits package offered by your employer. If so, look at the level of cover offered to determine whether it’s adequate for your needs.
It’s also important to remember that any such protection is tied to your employment, meaning that if you leave or lose the job, you’ll also lose the protection. While it should then be possible to take out your own cover, remember that you become more of an insurance risk as you get older. This means that the longer you leave it before taking out life insurance, the higher the premiums are likely to be.
Inflation is another thing to think carefully about. You may insure yourself for a sum that seems huge when you take out the policy, but at the end of a 25-year term inflation may have eroded the value.
The main benefit of life insurance during the lifetime of the policy is likely to be peace of mind, but many policies offer other potential benefits such as terminal illness cover.
Term life insurance
A term policy covers you if you die within a set period of time, the length of which you choose at the outset; such policies are often used to cover the term of a mortgage, or the time until a child becomes an adult.
According to the Association of British Insurers (ABI), in 2017 the average payout on a term life insurance policy was £78,323, with 98% of claims being paid.
Level or decreasing term life cover?
The main choice with term insurance is usually deciding whether to opt for a decreasing term policy – where the potential payout drops over time, perhaps in line with a repayment mortgage – or a level term plan, where the sum insured remains the same across the entire term of a mortgage.
Increasing term insurance is rare, but is another option whereby the amount insured increases over time. Such a policy can cover the effects of inflation and may, for example, be taken out by someone planning to expand their family. Other variations include:
- Renewable term insurance (a short-term policy carrying the option to renew at the end without the need for further medical assessment)
- Convertible term insurance (which has the potential to be turned into a whole of life policy without the need for further medical assessment)
- Renewable and convertible hybrid (a term policy with the potential for renewal and/or to be turned into whole of life)
The greater the flexibility you choose when deciding your options, the more you’re likely to pay in premiums.
Family income benefit is another term life insurance option, the main difference from a standard term policy being that a successful claim will result in the payment of a monthly income rather than a lump sum.
Whole of life insurance
A whole of life insurance policy is guaranteed to pay out whenever you die, assuming you’ve kept up premium payments and haven’t breached the policy terms.
Because of this guarantee, premiums are likely to be far higher than for term policies and the sum insured tends to be lower.
According to the ABI, in 2017 the average whole of life insurance claim payment was £4,511 with 99.99% of claims paid.
A typical reason for taking out a whole of life policy is to guarantee payment of a chosen sum to loved ones after the policyholder’s death.
Some people may opt for such a policy to cover the costs of their funeral; if this is the reason it’s worth thinking about writing the policy in trust (see below) to ensure that the funds are released in time to pay the funeral expenses.
So-called over 50s life insurance policies are a particular type of whole of life insurance, typically sold on the fact that those aged 50-80 are guaranteed to be accepted for a policy without needing to take a medical.
There are numerous downsides to such policies, though. If you’re considering one, note that they’re NOT the only type of life insurance available to the over 50s; people in this age group can also take out term insurance policies and other types of whole of life cover.
You may also want to consider alternative options such as funeral plans or self-insuring – where the money that would have been paid out in premiums is instead put into your own savings and/or investments.
Writing life insurance in trust
Writing a life insurance policy in trust is a simple process that can be requested when taking out the product. It has potential benefits in terms of inheritance tax and speeding up payments to beneficiaries.
In many cases this will be a good option to choose, but there are times when it isn’t always needed. If you’re taking out a joint life insurance policy, for example, it’s less important as the payout from the policy would go directly to the remaining policyholder. However, if the policyholders have children a trust can still make sense to cover the instance that both partners pass away at the same time.
An expert adviser can help you decide whether or not to write in trust and can explain how this is done.
How life insurance premiums are calculated
The type of policy you choose, the amount you insure for and the policy term are major factors in determining how much you have to pay in premiums, as are:
- Your age
- Your state of health
- Your medical history
- Your height and weight
- Whether you’re a smoker
Broadly speaking, the older you are, the unhealthier you are and the riskier your lifestyle, the more you’re likely to pay in premiums. This is because an insurer will judge that a claim is more likely to be made on a term policy, or it will calculate that you’re likely to make fewer premium payments on a whole of life policy. Other things that may be taken into account include:
- Your family’s medical history
- Whether you partake in any hazardous hobbies
- Lifestyle choices such as alcohol consumption
- Optional cover areas added to the policy
Note also that premiums can be guaranteed – meaning they won’t change in the course of a policy – or reviewable. Choosing a reviewable premium may be cheaper at the outset, but it could prove significantly more expensive in the longer term as insurers are free to raise your premiums over time. This may happen if, for example, the provider experiences higher claim levels than it had anticipated, or if a major change in interest rates increases its cost base.
Life insurance and critical illness cover
Life insurance is frequently bundled together with critical illness cover, but it’s perfectly possible to buy one without the other. A life insurance policy is likely to be significantly cheaper if you don’t include critical illness cover, but adding life insurance to critical illness cover shouldn’t significantly alter the cost of a critical illness policy.
If you buy both types of cover together, there will be two main options open to you; an integrated critical illness policy or an independent one. With an integrated policy there can be only one payout, meaning that – should you make a successful critical illness claim – there will be no further payout from the life insurance after you die. Independent critical illness cover allows the life insurance element of the policy to continue after a successful critical illness claim.
Exclusions on life insurance
As with any sort of insurance it’s vital to read the terms and conditions and to be aware of any exclusions associated with the product.
“When claims are declined this is usually due to the customer not disclosing important information when taking out the policy, or claiming for a condition that is not covered by the policy,” says the ABI.
There are likely to be restrictions on age and on the length of a term product; for example, some policies may not cover those aged over 70, others may not commit to a term length of over 35 years.
Suicide is likely to be an exclusion, but this should only be for a set period of time – usually 12 months – after the policy is taken out. Alcohol, drug abuse and criminal acts are also potential exclusions.
Other exclusions can be as diverse as the range of policies available. For example, should you enjoy sailing it’s typical for cover to be offered if a fatal accident happened during recreational sailing, but it may be excluded if you were taking part in a cross-Atlantic race.
Exclusions on pre-existing medical conditions
The issue of pre-existing medical conditions is a key one and you’ll need to declare your medical history when you apply for life insurance. Failing to do this accurately is fraud and could also invalidate any policy you subsequently took out. Based on your medical history, the insurer may do one of three things:
- Offer the policy on its standard terms
- Place an exclusion on the policy relating to the pre-existing condition
- Cover the pre-existing condition but charge a higher premium to reflect the increased risk
Arranging the right life insurance
As with any form of insurance, the general advice to shop around for the right deal and to read the terms and conditions with care holds true.
To get an idea of the sort of options that may be open to you, try our quick and easy online life insurance cover comparison service that shows payout levels, policy terms, whether premiums are guaranteed or reviewable and the monthly cost.
But for such an important product, it’s worth taking expert advice from a firm such as Drewberry Insurance to help work out what you need.
You can speak to an expert adviser at Drewberry by calling 02084327333, or – to save your phone bill – arrange a call back with one of our financial advisers.
We exist to ensure you have all the information and support you need to make the right decisions when it comes to your financial protection.
Please do not hesitate to give us a call if you need some guidance.
Independent Protection Expert