Get The Correct Life Cover Plan
Read our comprehensive Life Insurance Guide today, written for people across the country and full of helpful information, hints and money saving tips.
Generally in Britain most people purchase life cover for their own piece of mind. They’re content in the knowledge that if something happens to them, their family will be kept financially safe.
However even though this is a nice thought, getting the right type of cover for your requirements can be a little tricky. After all, insurance is a complex beast to master.
You should always read all policy documentation and the insurers terms and conditions before you agree or sign any contract. Make sure you’re 100% happy with all the details including what is and isn’t covered.
Life Insurance v Life Assurance
There’s a common myth in the UK that these two terms are interchangeable however they’re not. Firstly a life insurance policy will ‘pay out’ if something happens to you. This generally refers to policies, which are covered for a set period of time. On the contrary life assurance means an insurer will pay out when something does happen. These are more aligned with whole of life insurances.
For example, let’s say Margret took out life insurance, this will only pay out if something happens to her during the policy duration. On the other hand Paul has taken out Life Assurance, this means the insurer will pay out at any time because the insurance has no end date.
As you can see the two words are quite similar, yet mean different things.
Types of Life Insurance Cover
In Britain most mainstreams providers can offer different kinds of life insurance, however typically they offer:
- Term Life Insurance – This means that a person is covered for a fixed period of time. Typically policyholders will agree to ‘reduce’ their premiums by agreeing to decrease their term life insurance. This means that the payout will ‘shrink’ as each year passes. To confuse matters even further you can also get different levels of cover within a termed policy, for example level term, decreasing term, increasing term and renewable term. Please Click Here to read more about term life policies in our easy to follow guide.
- Whole of Life Insurance – This type of cover tends to be more expensive that term life insurance, as your insurance provider will pay out whenever you die. This means that your premiums generally don’t decrease year on year, and you could be paying for the insurance after you retire. As you can see, this means you have to work out whether this form of cover is right for your requirements and your budget. Please Click Here to read our whole of life policy guide in more detail.
If you find that life insurance isn’t right for your needs, you can also take a look at income protection insurance or critical illness cover. While not as wide-ranging as life policies these may be applicable to some people.
Do I Need Life Insurance?
Typically life insurance is a good way to ensure that your loved ones are taken care of financially when you die. Generally you should ask yourself:
- Would my death have a financial effect on my family?
- Would my family be able to support themselves without my income?
Life insurance can be ideal for many people as you can specify whether you want a ‘lump sum’ to be paid out or regular payments.
If you’re the ‘breadwinner’ in the family then life insurance should certainly be considered, however some families who have two partners working might not feel life insurance is good for their circumstances. Sometimes though, dual earners can get excellent discounts on ‘joint life cover’ and should be at least explored to see if its applicable to their needs.
As we’re all different and have a different set of circumstances only you, yourself will know if a personal life plan would help your family or not.
How Much Life Cover Should I Get?
As you can imagine, this is a person opinion depending on unique circumstances and individual requirements. Typically you need to think about how much your salary contributes to the running of the family home. If two people are earning, it may not cover as much as you think, however you will need to do your sums.
Firstly work out how much outstanding debt you have, this includes all credit cards, car payments, loans and mortgages. Generally speaking this figure is the amount you will probably want to cover in event of your death. This will mean the basic needs of your family will be covered and cared for.
However, of course you need to understand that the bigger the cover, the bigger the premium. You should also include any potential premium costs into this larger calculation too.
Even though this is a lot to think about, you need to look further into the future, if your partner suddenly became a single parent, would they still be able to work? If not, you may have to factor some of their lost salary into the overall total as well. As you can see, this rather simple task has a lot of things, which need to be considered.
If you find yourself feeling trapped, it can be a good idea to seek professional advice for an advisor who will be able to talk you through the correct level of insurance for your requirements.
If you have no dependents you may decide that you don’t need any insurance at all, however this is of course for you to decide whether or not, this is applicable to your circumstances.
There’s a common misconception that people think they don’t need a life policy because they have a standard death-in-service cover through their employer.
This scheme will ‘pay out’ a tax-free sum in the event of a person dying while at work. This can be as large as four or even five times their annual salary. Typically though, this sum can still be low compared to some life insurance policies, which can ‘pay out’ much higher amounts depending on the level of cover chosen.
Generally you may find that some insurance advisors will recommend life cover at around 10 times annual salary. This number can make premiums quite large depending on your salary amount, so remember to consider your budget and see if this figure works out for your needs.
Over 50s Life Insurance Cover
Over the past decade or so, over 50s life plans have become really popular throughout the country.
Generally speaking over 50s life insurance cover will require no medical questions and anyone aged 50-79 is typically guaranteed to be accepted.
As there are no medical questions, this also means there’s usually no assessment or any requests to a Doctor for medical reports or history records.
However there is usually a ‘qualifying period’, this basically means if the policyholder dies within a certain time frame (typically the first 12 to 24 months) the benefit amount will not be paid. The policyholder’s heirs will only receive a refund on the premiums paid until the date of the death.
As each insurance company operates differently, you need to read all of the documentation to see how long the qualifying period is. For some it’s as little as 12 months, however for others it can be longer. This does and will vary massively depending on each individual provider.
Remember it’s always recommended to take out over 50s cover as soon as possible, don’t leave it too ‘late’ as some insurers may not provide cover for people over a certain age.
Tax on Life Insurance Payouts
The UK tax system can be complicated at the best of times; generally life insurance payouts are not liable for income tax or capital gains tax. However, some people could liable be depending on their circumstances. For example a person’s ‘heirs’ may be liable for inheritance tax on the funds, while the tax doesn’t affect the life insurance of the person itself, it may affect future generations.
For some this can seem unfair, so they decide to have their life insurance policy written in trust. You will need to consider whether this option is a good idea for yourself and your family. For some people it is, for other it isn’t.
For more information regarding a life insurance policy written into trust, you will have to seek professional legal advice from a solicitor. Generally speaking, most people arrange for this to happen at the same time of making a will.
Setting up a trust is relatively easy and you can put your insurance policy in a trust at any time. Typically though most people do it as soon as they take the cover out.
The trust can also have other positive attributes to, for example:
- It can lead to a quicker pay out, as the life insurance policy will generally not be in probate.
- You can easily arrange who gets control of the money because you specify the beneficiaries.
Always remember that tax is a complex area and you should never attempt setting up a trust without proper legal advice and assistance.
Life Insurance Money Saving Tips
Typically the best piece of advice is to get a life policy as young as possible. The older you are the higher premiums you will face, as you’re more likely to make a claim. Equally as you age, you’re more likely to face health issues, which obviously means obtaining insurance that little bit harder.
Some insurers will exclude people based on ‘pre-existing health conditions’, this can range from epilepsy, heart conditions, strokes, cerebral palsy and so on. As each insurance provider has a different set of rules, you will have to shop around to find the right quote for you.
You will also need to remember that ‘switching’ insurers is quite a common thing to do, just like you would for car insurance. Sometimes you can get great deals if you simply shop around. This type of tactic is certainly applicable for people who purchase limited term policies.
Speaking of time fixed policies, these tend to be the ‘cheapest life insurance plans’ on the market in the UK. If you can’t afford a whole life policy, then term insurance is probably the best way to go. If you’re unsure about which level of cover is right for your needs, remember you can always seek professional advice.
Original Publication: 31 May 2017
Last Updated: 23 July 2017