Learn about the various types of life insurance, the numerous justifications for wanting (or needing) it, and how to select the best life insurance products and counsel for you.
If you have life insurance, it gives you protection in the event of the death of someone you depend on financially, or it gives your loved ones financial security in the event of your passing.
A knowledgeable life insurance advisor can assist you in selecting the finest solutions for your needs so that you are adequately protected against risk and don’t overpay for unnecessary insurance.
What is life insurance?
When the individual insured passes away, their life insurance policy pays out a lump amount.
You can get insurance that will pay benefits regardless of the moment of death, unlike certain policies that only pay benefits if the insured person dies before a certain age (such as term life insurance) (whole-of-life policy).
Do I need life insurance?
A financial advisor might suggest life insurance if your demise will leave your family in financial peril.
The same rules apply if you are financially dependent (to some extent or fully) on a family member, such as your spouse.
To protect the remaining partner in the event of one partner’s death, a married or cohabiting pair may purchase a joint life insurance policy.
Further information on how much life insurance you require is available here.
Is life insurance a requirement for obtaining a mortgage?
Theoretically, life insurance is not required when obtaining a mortgage to purchase a home because the lender can be reimbursed for the loan through the sale of the property.
But, if you share a property with a spouse or have dependents, you won’t want the forced sale to result in their eviction. Because of this, you should consider life insurance to be necessary when you take out a mortgage if you have a family.
If either you or your partner should pass away, a joint life insurance policy will guarantee that your mortgage is entirely paid off.
What kinds of life insurance are there?
There are countless variations on life insurance. This is a helpful rundown of the key policies, which are several and include the question “what life insurance do I need?”
A term life insurance policy only pays out if you pass away before to a predetermined age and insures you for a specific amount of time.
For instance, you might want the coverage to be in effect until you retire. Or until your kids are grown up, at which point they are less likely to need you.
The pay out and premiums for increasing term life insurance, as the name implies, increase as you age.
It is intended to rise in step with inflation so that the amount you desire to leave to your loved ones keeps its genuine value.
The reverse of increasing is decreasing, when your pay out decreases as you age.
These plans are sometimes tied to a sizable loan, like a mortgage, and the amount drops as the balance owed gets smaller.
Your premiums with level term insurance remain constant for the course of your coverage.
No matter when you pass away—after five or thirty years—the payout remains the same.
Whole-life insurance pays out upon your passing, whenever that may be.
The premiums will be greater than for a term life policy, and you will have to continue paying them until you pass away, as this guarantees a certain payout at some point.
This implies that if you live a long life, you may theoretically pay more in premiums than would be paid out upon your death. A whole-life insurance policy is frequently used to pay for inheritance taxes, nevertheless.
One policy, known as joint life insurance, protects you and a partner or spouse, typically.
It is frequently used when people take up shared mortgages to ensure that the surviving person isn’t left to pay off the full mortgage by themselves. It only pays out once.
It can also be applied to safeguard business associates and the company. Sometimes it’s just less expensive than purchasing two separate plans.
You have the option of receiving payment upon either the first or second death. Individuals who choose the latter frequently want their children or other dependents to receive the payout.
Over 50s cover, often called funeral plans, is a way to leave a gift to loved ones when you die.
They’re usually used to prepare for your funeral costs. You can take a plan out when you’re over 50 and pay premiums each month. The pay out will depend on the plan you choose and the numbers of premiums you’ve paid.
With this insurance, you may rest easy knowing that, in the event of a serious illness or injury that prevents you from working, your financial needs will be met.
If this occurs, you’ll typically receive a lump sum payment that is tax-free, which most individuals use to pay off their mortgage or make up for lost income. Due to the fact that only certain diseases and injuries are covered, carefully review the language of each insurance.
Critical sickness protection and terminal illness insurance are slightly different. If you are diagnosed with a terminal illness and are told you have a set amount of time to live, it enables you to get the benefit of your life insurance.
It frequently serves as an addition to other life insurance plans, such as whole-life coverage.
Few insurance companies provide these alluring policies, which are free and pay out to your children, but they often only last a year and have a payout of £15,000.
In order to provide immediate protection while you think about your longer-term life insurance plans, the idea is to obtain a policy for each of your children (typically for those under the age of four).
Using life insurance to pay inheritance tax obligations
A whole-of-life insurance policy can be used to pay for any inheritance tax (IHT) that may be due upon your passing.
IHT frequently needs to be paid before the money in the estate is distributed, and your beneficiaries might not have enough readily available money to spare. This is one of the challenges with IHT.
Setting up a life insurance policy particularly to pay the IHT tax is one option that some people employ.
To ensure that the pay-out itself is tax-free and may be used to pay HMRC, the policy must be set up to pay into a trust that is separate from your estate. The payout itself will be subject to IHT if the policy does not pay into a trust!
Trusts are a specialized subject, so before creating one, make sure to first speak with a financial advisor and a lawyer. Learn more about estate planning and trusts.
How to get life insurance
It’s not too difficult to purchase a life insurance coverage. You can shop around for plans on price comparison websites and buy one online, just like you would for, say, auto insurance.
Also, you can typically modify or cancel your policy and switch to a different provider if you want to make changes.
Just be aware that there can be cancellation fees (known as a surrender value).
You should see a financial advisor for life insurance advice before purchasing a policy to ensure that it is appropriate for your needs and financial condition as the amount of coverage you require actually relies on your circumstances and those of your family.
Can I purchase life insurance for a relative?
If they don’t feel comfortable handling it themselves, you can purchase life insurance that insures someone else (such as a parent). To be insured in that way, you must, of course, obtain that person’s written approval.
Furthermore, you must be able to show that you have a “insurable interest” in that person. By doing so, you must demonstrate how losing them will harm your financial situation.
You won’t be able to purchase life insurance on someone if you don’t rely on them financially in any way. This is done to make sure that no one can profit monetarily from the passing of another person.
In short, you can insure your spouse, or a parent / other relative who supports you financially, but you are unlikely to be able to insure your children (unless they earn an income on which you depend, e.g. from acting).
Can I purchase life insurance for my staff members?
If you own a business, you are aware that some of your employees are crucial to its functioning and difficult to replace. These are referred to as “important persons.”
Several companies that recognize these critical individuals will get specialized life insurance to protect them in the event of their passing or disability. Study up on key person insurance.
What is the price of life insurance?
The price of life insurance varies greatly depending on your age, health, and way of life (such as whether or not you are a smoker). Also, it will differ depending on the source and the magnitude of the payout you desire.
Nonetheless, a ballpark estimate can be provided. The monthly premium for a term life insurance policy with a 30-year term that pays out £100,000 if you pass away within that time would be around £6 for a 30-year-old nonsmoker.
Given that the mortgage balance would decrease over time, mortgage life insurance would be somewhat more affordable.
Smoking is one lifestyle choice that significantly raises the cost of life insurance. From the age of 40 and onwards, monthly premiums are often double as expensive if you smoke.
How can I locate the greatest life insurance? Can a financial advisor assist me?
It can be really difficult to locate the best coverage for you at the most reasonable price, but working with a knowledgeable IFA who specializes in life insurance can help.
The use of price comparison websites to purchase insurance of all types is becoming more and more common, but it is essential to exercise a little more caution when purchasing life insurance.
One of the biggest changes a person may go through is the death of a close family member, which is also the worst time to be uncertain or financially unstable.
Furthermore, sometimes it can be difficult to find affordable life cover or critical illness insurance, particularly if you have pre-existing conditions.