Life insurance 101

Do you have financial dependents or a mortgage?

Then you may benefit from life insurance, regardless of your age or current health – because we never know what life holds, or how long it will last. Your loved ones will still need your support, even if you are not there to give it. 

Cover can cost as little as a few pounds a month, which seems a small amount in return for a guaranteed payout for those who depend on you if you die. 

What’s the point of an insurance policy that you can never claim on? A life insurance payout could help your family keep their home, replace your income and sustain their lifestyle. It is part of caring for them, and it means peace of mind for you.

But there are many types of life cover. Making sure you have the one that is appropriately suited to your family, your age and your health is vital.

Whole of life insurance or fixed term assurance 

Insurance and assurance both provide life cover, but they are slightly different.

Insurance or ‘term life’, is typically the cheaper option because it only insures you for a fixed period – for example, 10 or 20 years. 

Many people choose term life cover to end when they start drawing a pension, or when their mortgage is paid off.

There are few variations within term life policies.

Level term is the simplest. The lump sum promised stays the same throughout the life of your policy

Decreasing term means the payout amount will decrease over the course of the policy, which ends when the payout decreases to zero. It’s usually used to safeguard a mortgage, and it should decrease at the same rate as your mortgage debt.

Increasing term insurance has a payout that grows over time either by the same amount each year, or linked to inflation and the Retail Price Index.

Life Assurance or ‘whole of life’ policies are a little different. They cover you until you die, however far in the future that may be. These policies cost more and tend to be ‘guaranteed acceptance’, meaning that the payout will go through as long as you keep up with your premium payments. They may have added benefits such as early payout for long-term care.

They can also make up an important part of inheritance tax planning, if set up in the right way.

If when you die your estate is liable to inheritance tax, your life cover payout will simply be added to your estate and be currently subject to 40% tax along with the rest of your estate.

On the other hand, if you arrange for it to be written into trust – which can be a simple as completing and signing a form –your payment is outside your estate, and free from the taxman’s attentions.

Other types of policies

A joint life policy might be a good option for couples, as they can be cheaper than two individual policies. With a ‘first-death’ policy, there will only be a payout when one of the partners die. The policy will end, and the survivor will not be covered. A ‘second death’ policy will only pay once both policy holders pass away and is usually only offered as a whole of life policy. 

For older people, an over-50s policy might be one of the only ways you can get cover. These usually have guaranteed acceptance and offer a guaranteed payout but tend to be more expensive.

What does it all cost?

If you’re not sure how much cover your need, a rule of thumb is to look for a payout that is worth 10 times the salary of the highest earner in your household. 

The cost of your life cover will depend on be your age, your health and how much you want the payout to be. Generally, policies become more expensive as you age, and if you are unwell – and more likely to mean a payout for the insurer.

There’s no limit on the number of life insurance policies you can take out, and you might want different policies to cover specific things like your mortgage, and another for more general cover. 

However, you will end up paying more in premiums, and it might be that one policy could cover everything.

This is why expert help with arranging life cover is essential. Knowing you have the type and level of cover you need is easier with independent advice. What’s more, it is a competitive market, and shopping around could save you money.

A call to us at Continuum could provide all the help you need.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable Protection products or investment strategy, you should seek independent financial advice before embarking on any course of action.

Your home may be repossessed if you do not keep up repayments on your mortgage

The Financial Conduct Authority does not regulate taxation and trust advice or will writing.

Guarantees are subject to individual circumstances and needs. All individuals should fully disclose all relevant information to secure their insurance needs.

Over 50’s plans – Moratorium – although acceptance is guaranteed, the full sum assured may only be payable after a specified initial period.

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