Life Insurance Life Assurance
Not everyone needs life insurance. But if your children, partner or other relatives depend on your income to cover the mortgage or other living expenses, then the answer is yes – you probably do want life insurance, since it will help provide for your family in the event of your death.
WHAT IS LIFE INSURANCE?
There are several different kinds of life insurance. Our team of advisors can help you find the right policy for your individual circumstances, from all of the options available to us via the providers we work with.
WHAT TYPE OF LIFE INSURANCE POLICY SHOULD I BUY?
Most people have two main protection needs that can be covered by life insurance (often known as life assurance):
- Paying off large debts such as your mortgage
- Family protection, where you leave behind money for your family to live on after you’ve died.
Different types of insurance policy are good for different protection needs, but it is best to speak to an adviser to ensure you review all available options and secure the right policy for you.
THE MAIN TYPES OF LIFE INSURANCE POLICY
There are several types of Life Insurance policy available and it is important to select the right policy to suit the needs of you and also your family. We’ve listed some of the main types of Life Insurance policies available in the UK today, although please bear in mind this list is not exhaustive.
The most basic type of life insurance is called term insurance, where you choose the amount you want to be insured for and the period for which you want cover. If you die within the term, the policy pays out to your beneficiaries. If you don’t die during the term, the policy doesn’t pay out and the premiums you’ve paid are not returned to you.
There are two main types of term assurance to consider – level-term and decreasing-term insurance. Sometimes a combination of the two is the best answer.
LEVEL-TERM LIFE INSURANCE
A level-term policy pays out a lump sum if you die within the specified term. The amount you’re covered for remains level throughout the term – hence the name. The monthly or annual premiums you pay usually stay the same, too.
Level-term policies can be a good option for family protection, where you want to leave a lump sum that your family can invest to live on after you’ve gone. It can also be a good option if you need a specified amount of cover for a certain length of time, eg to cover an interest-only mortgage that’s not covered by an endowment policy.
DECREASING-TERM LIFE INSURANCE
With a decreasing-term policy, the amount you’re covered for decreases over the term of the policy. These policies are often used to cover a debt that reduces over time, such as a repayment mortgage.
Premiums are usually significantly cheaper than for level-term cover as the amount insured reduces as time goes on. Decreasing-term insurance policies can also be used for inheritance tax planning purposes.
FAMILY INCOME BENEFIT POLICIES
Family income benefit life insurance is a type of decreasing term policy. Instead of a lump sum, though, it pays out a regular income to your beneficiaries until the policy’s expiry date if you die.
The upside of family income benefit is that it’s easier to work out how much you need. For example, if you take home £2,000 a month, you can arrange for the same amount to be paid out to your family if you die.
However, there is a downside, too. If you die two years into a 20-year family income benefit policy, your family could get £2,000 a month for 18 years. But if you die a year before the policy ends, your family gets £2,000 a month for just one year.
WHOLE LIFE POLICIES
As the name suggests, whole-of-life policies are ongoing policies that pay out when you die, whenever that is. Because it’s guaranteed that you’ll die at some point (and therefore that the policy will have to pay out), these policies are more expensive than term assurance policies, which only pay out if you die within a certain timeframe.
DO I NEED LIFE INSURANCE?
Life insurance can pay your dependents money as a lump sum or as regular payments if you die. It’s designed to provide you with the reassurance that your dependents will be looked after if you’re no longer there to provide.
The amount of money paid out depends on the level of cover you buy. You decide how it is paid out and whether it will cover specific payments, such as mortgage or rent.
You may also need to think about whether receiving a pay-out will affect any means tested benefits your dependents might otherwise be eligible for.
WHAT ISN’T COVERED BY LIFE INSURANCE?
Life insurance usually only covers death – if you can’t provide for your family because of illness or disability, you won’t be covered. Some life insurance policies provide a terminal benefit, although these are not automatically granted.
A terminal benefit will pay out on diagnosis of a terminal illness. Be sure to check the terms and conditions of your policy to see if you’re covered.
Most policies have some exclusions (things they don’t cover). For example, they might not pay out if you die due to drug or alcohol abuse, and you normally have to pay extra to be covered when you take part in risky sports.
If you have a serious health problem when you take out the policy, your insurance might exclude any cause of death related to that illness.
If this is the case, however, there are options available to you. It is still possible to buy other insurance products tailored to assist in these circumstances, which cover:
- Long-term illness
- Critical illness cover, or
- Total and permanent disability
DO I NEED LIFE INSURANCE?
Not everyone needs to have a Life Insurance policy, however it is certainly something worth considering if you have:
- Dependants, e.g. school age children
- A partner who relies on your income, or
- A family living in a house with a mortgage that you pay – a life insurance policy can provide for them if you die.
HOW MUCH DOES LIFE INSURANCE COST?
Life insurance can be very good value. The price you pay for a life insurance policy depends on a number of variables – these are likely to include:
- Your age
- Your health
- Your lifestyle
- Whether you smoke
- The length of the policy
- The amount of money you want to cover
For example, the younger you are and the less likely you’re to die from a medical condition, the cheaper your policy is likely to be.
DO I ALREADY HAVE LIFE INSURANCE?
If you have an employee package that includes ‘death in service’ benefits, this will cover you for a multiple of your salary. It’s up to you to work out if this policy is enough to cover your needs and whether or not you need an additional life insurance policy.
Bear in mind if you stop working for that employer, you won’t be covered under their policy anymore.
Inheritance Tax Planning is not regulated by the Financial Conduct Authority.
Critical Illness Cover
Critical illness cover, also known as critical illness insurance, is a long-term insurance policy which covers serious illnesses listed within a policy. If you get one of these illnesses, a critical illness policy will pay out a tax-free, one-off payment. This can help pay for your mortgage, rent, debts, or alterations to your home, such as wheelchair access, should you need it.
WHAT IS CRITICAL ILLNESS COVER?
Critical illness insurance will pay out if you get one of the specific medical conditions or injuries listed in the policy. But be aware that not all conditions are covered and policy will also state how serious the condition must be.
Don’t confuse critical illness cover with life insurance, although they are sometimes sold together.
Every year, 1m workers in the UK unexpectedly find themselves unable to work because of injury or illness, according to the ABI (2015). Examples of critical illnesses that might be covered include:
- Heart attack
- Certain types and stages of cancer
- Conditions such as multiple sclerosis
Most policies will also consider permanent disabilities as a result of injury or illness. It only pays out once and then the policy ends.
Some policies will make a smaller payment for less severe conditions, or if one of your children has one of the specified conditions.
WHAT ISN’T COVERED?
Some serious illnesses might not be covered, for example, some cancers and conditions not listed in the policy.
You probably won’t be covered for health problems you knew you had before you took out the insurance, and this type of insurance doesn’t pay out if you die. What’s covered and what’s not, will be set out in the policy details so make sure you’re fully aware of them and that they cover your needs.
DO I NEED CRITICAL ILLNESS COVER?
State benefits might not be enough to replace your income if something goes wrong.
If you’re eligible, welfare benefits range from around £57.90 a week to just over £114.85 a week, depending on your circumstances (i.e. whether or not you have children, a certain level of savings, or if your partner works).
You should certainly consider getting critical illness cover if:
- You don’t have enough savings to tide you over if you become seriously ill or disabled.
- You don’t have an employee benefits package to cover a longer time off work due to sickness.
WHO DOESN’T NEED A CRITICAL ILLNESS POLICY?
You might not need a Critical Illness Policy it if:
- You have enough savings to fall back on and can cover expenses such as bills, loans, medical costs or a mortgage.
- You have a partner who can cover living costs and any shared commitments, such as a mortgage.
- You already have some cover included in as part of your employer’s employee benefits scheme.
HOW MUCH DOES A CRITICAL ILLNESS POLICY COST?
Your monthly payments will depend on a number of variable factors, that are all taken into consideration to determine the level of cover you are likely to require.
- The amount of cover you take out
- Whether you smoke or have previously smoked
- Health (your current health, your weight, your family medical history)
- Job (some occupations carry a higher risk than others and might mean you have to pay more each month
Income Protection Insurance
Each year close to a million people in the UK find themselves unable to work due to a serious illness or injury (ABI 2015). Income protection insurance is designed to give you some cover if you can’t earn an income for those reasons.
If something happened to you would you be able to survive on savings, or on sick pay from work?
If not, you’ll need some other way to keep paying the bills and you might want to consider income protection insurance.
Income protection insurance (sometimes known as permanent health insurance) is a long-term insurance policy designed to help you if you can’t work because you’re ill or injured.
It ensures you continue to receive a regular income until you retire or are able to return to work.
An Income Protection Insurance Policy will replace part of your income if you can’t work because you become ill or disabled.
The policy will pay out until you can start working again or until you retire, die or the end of the policy term – whichever is sooner.
There’s often a waiting period before the payments start – you generally set payments to start after your sick pay ends, or after any other insurance stops covering you. The longer you wait, the lower the monthly premiums.
It covers most illnesses that leave you unable to work, either in the short or long term (depending on the type of policy and its definition of incapacity).
You can claim as many times as you need to – while the policy lasts, however it’s important to fully review the policy before committing as each will have their own terms relating to claims. With income protection insurance, everything depends on getting the right policy.
DO I NEED INCOME PROTECTION INSURANCE?
According to the ABI, one million workers a year find themselves unable to work due to a serious illness or injury.
It doesn’t matter whether or not you have children or other dependants – if illness would mean you couldn’t pay the bills, you should consider income protection insurance.
You’re most likely to need it if you’re self-employed or employed and you don’t have sick pay to fall back on. Always check what your employer will provide for you if you’re off sick.
It is possible you might not need income protection insurance if:
- You could get by on your sick pay. For example if you have an employee benefits package which gives you an income for 12 months or more.
- You could survive on government benefits. But they might not be enough to cover all your outgoings.
- You have enough savings to support yourself. Remember that your savings might need to see you through a long period.
- You could take early retirement. If you’re near retirement age, perhaps you could afford to retire early. If you’re unable to return to work you might be entitled to take your pension early.
- Your partner or family would support you. Perhaps your partner has enough income to cover everything the two of you need.
HOW MUCH DOES INCOME PROTECTION INSURANCE COST?
How much you pay each month will depend on the policy and your circumstances. Usually income protection insurance covers a wide range of illnesses and situations and has the potential to pay out for many years.
The cost of a policy will vary based on a number of variable factors, including:
- Your age
- Your job
- Whether you smoke or have previously smoked
- The percentage of income you’d like to cover
- The waiting period before the policy pays out
- The range of illnesses and injuries covered
- Health (your current health, your weight, your family medical history etc)
It’s important to review more than one policy, and be sure take advice on these matters prior to committing to a policy.
If you own your own home, you’ll need to have buildings cover just in case your home is damaged and needs a repair. Most often lenders will need to be sure that a policy is in place before they approve an application.
If you’re a landlord, it’s your responsibility – not your tenants.
If you own your own home this sort of insurance should be a top priority.
WHAT IS BUILDINGS INSURANCE?
This is a policy which covers damage to the structure of your home such as the walls, roof and floors.
Home insurance is a general term used to describe two very different types of insurance:
- Buildings insurance – for permanent fixtures and fittings, like kitchens and bathrooms
- Contents insurance – for things you keep in your home, like furniture, TVs, personal belongings and some types of flooring including carpets
You can buy both types of insurance separately, or in many cases, you can get them as a joint policy from one insurance company.
DO I NEED BUILDINGS INSURANCE?
If you own your own home or are renting out a property then you’ll need to have buildings insurance.
So not having a policy in place could put your mortgage – and your home – at risk.
You don’t need buildings insurance if you’re renting a property, because it is your landlord’s responsibility to sort out a buildings insurance policy.