There comes a time when we all need to think about financial protection and often the first thing that comes to mind is life insurance also commonly known as term assurance.
|
What does it cover? |
What are the benefits? |
life
insurance quote
|
||||||||||||||||
|
|
In it’s simplest form it provides financial protection for your loved ones shoud the worst happen. By taking out a life cover you are covered in the event of death, your loved ones would receive a sum of money equal to the level of cover you required to help take care of them and meet your monthly financial obligations.
Interestingly, only about half of the UK population has life insurance coverage which is quite scary when you consider the only things in life that are guaranteed are death and taxes. There are a wide variety of life insurance products from ones that pay out a lump sum to those that pay out a monthly benefit. It is important to choose the policy that best fits you needs.
Questions to ask yourself when buying life insurance coverage?
Before we start discussing the ins and outs of life cover it is good to keep in mind the questions below to get a better understanding of what type of policy would best suit your needs.
- What monetary sum would your family require to cover the financial obligations left behind should the worst happen?
- For how long would you like the cover to last, your whole life, until the children leave home?
- Do you want to cover a specific debt or simply provide your loved ones a lump sum to help them through the tough times?
- Do you want to include a critical illness policy with you life insurance?
- Do you want the policy to be written into a trust? (see Life Insurance Trust)
What are my life insurance coverage options?
There are four main types of insurance only life insurance coverage, each designed for a specific purpose.
Level Term Life Insurance
Level term insurance is the most basic type of life cover. You decide the level of cover and set the time period over which the policy will provide cover, say 25 years and the policy pays out a fixed lump sum should the worst happen during this time.
Decreasing Term Insurance
Decreasing term insurance as with level term insurance has a fixed cover period, say 20 years. Most often used to cover a repayment mortgage, decreasing term insurance cover declines over the life of the policy in line with the outstanding mortgage. For example, at the start of the policy £150,000 might be covered for 20 years but half way through the policy term the level of cover may have fallen to say £75,000.
Family Income Benefit
Family income benefit differs to term cover as the payout should the worst happen is monthly rather than the lump-sum provided by a term policy. If your family have consistent monthly obligations, such as loan repayments and expenses for necessities, then a family income benefit policy can formally structure what you leave behind.
Whole of Life Insurance
Guaranteed whole of life insurance is similar to the level term insurance cover in that the sum insured remains fixed however the cover is not determined by a time frame. A whole of life policy is guaranteed to payout at some point in the future, thus your family are ensured to receive financial support when you pass away.
Choosing the right life insurance coverage
Your decision on which type depends largely on the reasons you are taking out the life insurance policy in the first place. Term insurance is a good choice if you are looking to cover mortgage payments, whether an interest only mortgage or a principal repayment mortgage. It can be set up for the same amount of time as the length of your loan so that when your mortgage is up your life insurance policy ends.
Whole of life insurance is a plan for the future of your spouse and/or children, whether it is inheritance tax planning or you simply want to guarantee a financial sum in the event of death. Please be aware whole of life insurance is generally more expensive than term insurance as it ensures a pay out as the cover is not defined by a time period where term insurance will cover you for a set period, if you survive the cover period your policy terminates with no payout.
Typical life insurance coverage options
When buying your life cover there will be a number of options and choices to make, ranging from the type of premiums, whether fixed or reviewable to indexation and adding critical illness cover to the policy. Below we outline the options you will have to consider on most life policies and how they affect your policy and your premiums
Guaranteed or reviewable premiums is a choice we all have to make when buying a term policy. Guaranteed premiums ensure your rates are fixed throughout the life of the policy, premiums of £35 today are still going to cost £35 in 20 years time. Reviewable premiums give the insurer the right to review the risk associated with the policy every 2-5 years and thus change the premiums. It is the general consensus that reviewable premiums tend be cheaper in the short run but over a longer term often end up being more expensive than guaranteed premiums.
Indexation is often a popular choice, it ensures the sum insured is not eroded over time by inflation, it ensures £200,000 of cover today will still be worth the equivalent of £200,000 in say 20 years.
Waiver of premium will ensure your monthly premiums are met should you become seriously ill or injured and are unable to work, this is very useful given other financial obligations will still need to be met if you are not working.
Critical illness cover, one of the biggest considerations for term cover is whether to include a critical illness policy. Term assurance as a standalone product will only cover you on death, by including critical illness cover you are also protecting yourself against suffering a critical illness such as a heart attack, cancer or stroke. This is not a decision to be taken lightly, given the additional risk the insurer is bearing covering critical illnesses will see the premiums increase substantially.
Need help finding the right policy for you?
We hope this life insurance coverage guide should give you a good basic understanding when buying life cover. If you require some more information, a bit of guidance or simply want to compare term insurance quotes from the leading providers then let us now, dealing with insurance day in, day out we are in a great position to help.
For general insurance information and the regulation of the market see the FSA – money made clear site.
