Nobody likes to think about dying, which probably explains why nearly 3 million families across the UK don’t have the insurance in place to pay off the mortgage if one of the main breadwinners were to die unexpectedly. And for the mere third of UK adults who do have life cover, 79 per cent have never switched provider, meaning they could be paying over the odds for a policy, according to data from Compare the Market.
Life insurance isn’t the most exciting of purchases but it could end up being the most important financial product you ever buy. There are different ways to buy – online through a price comparison website, direct from a provider or through a qualified financial adviser (That’s us!). And there are several things to consider. Cheapest won’t always mean best, you’ll have to think about what the right level of cover is for you, and you’ll have to check what arrangements you may already have through work.
This guide will tell you what you need to know about how life insurance works! Remember as a general rule of thumb the younger you are when taking out a policy the cheaper you can lock your premiums in at!
What is life insurance and why do you need it?
Life insurance comes in many different shapes and sizes, with some policies providing cover until you die, and others set for a period of time, such as the duration of a mortgage. The cost each month is dependent on your health, personal circumstances, level of cover and the type of policy you opt for. The general rule of thumb is that those who own a mortgaged property with a partner, especially if they have children, should get life cover with the aim of clearing their home loan if they die.
This means the surviving partner and any children can remain in the house and will not have to worry about paying the mortgage on a reduced income. To this end, there are different types of life cover.
Level Term Insurance
Level term insurance offers a set payout for a set period of time. It can be taken out in conjunction with your mortgage term, or a planned working life, and will pay out a pre-agreed sum if you die during that period.
Decreasing Term Insurance
Decreasing term insurance covers you with a declining sum for a set period of time: usually used with a repayment mortgage, this reflects the fact that the outstanding debt will fall over time.
It is cheaper than level term insurance.
Whole of Life Insurance
This is a policy that lasts for the rest of your life. This kind of insurance pays out a set sum whenever you die.
Policies are usually made up of an insurance element and an investment element. This is often used to cover an expected inheritance tax bill.
Whole of life insurance is the most expensive form of life insurance.
Joint and Individual Policies
Life insurance policies can be joint or individual. It is worth comparing costs on both, as separate policies can work out cheaper for a couple – or only a little more expensive – and if something terrible happens and you both die they will both pay out.
In contrast, a joint policy will typically only deliver one payout on the first person’s death.
Reviewable premiums will only be set for a certain term and will most likely increase on a date in the future when they are reviewed.
If you write a life insurance policy in trust it falls outside of your estate, won’t deliver an inheritance tax bill, and will be paid directly to the person you specify it should go to without the need to wait for probate.
Providers or advisers will be able to help you do this.
How much cover do you need?
You will probably want your insurance payout to cover any remaining mortgage, pay for a funeral, and also leave some money to help with living expenses, but the more cover you take out the pricier it will be.
If you have a mortgage, then taking out mortgage term assurance will ensure that your mortgage is repaid when you die.
If you are on a capital repayment mortgage, taking out a decreasing term policy may be best; the pay-outs on these type of policies can reduce over time as the balance of your outstanding mortgage falls, resulting in lower premiums. If you are on an interest-only mortgage however, a level term life insurance policy will pay out a fixed lump sum when you die, meaning you will know exactly how much you are getting and can clear the outstanding capital balance. If you think you will end up moving home to a more expensive property as life progresses, it may be worth buying extra cover earlier on, as it tends to be cheaper the younger you are.
There is also increasing term insurance, which increases its payout either by a fixed amount each year or in line with inflation. This type of insurance is designed to factor in rising living costs. Premiums will also rise as a result, however. One key thing to consider when taking out life cover is what arrangements you already have in place. For example, employers can offer some form of death in service benefit, which may be a multiple of your salary. Pension pots built up can also be passed on to your family if you die. Check with your employer and pension provider what benefits you have before assessing the level of cover that you need.
Here at Protect365 we can guide you through the entire process ensuring that you get the very best cover to not only suit your needs but your budget too!
Enquire now and we will have a dedicated Insurance Specialist get in touch: http://bit.ly/2RWdq0n