Life insurance, while often overlooked, can be a crucial financial product, offering protection for dependents in the event of an individual's death. Despite its importance, many individuals do not purchase life insurance, with a significant percentage of those over 55 never having requested a quote, according to a MoneySupermarket survey.
Financial advisors typically recommend life insurance for individuals with children, other dependents, or a joint mortgage. Such policies can ensure a mortgage is paid off and provide financial support for a family facing the loss of income.
How Life Insurance Works
Life insurance policies generally provide a lump sum payout to beneficiaries upon the policyholder's death. Coverage can be for the duration of the policyholder's life or for a specified period. The monthly cost of a policy is influenced by several factors, including the individual's health, personal circumstances, the level of coverage desired, and the type of policy chosen.
For homeowners with a partner and children, life insurance with the aim of clearing the mortgage is often advised, allowing the surviving family to remain in their home without the burden of mortgage payments on a reduced income.
Types of Life Cover
Level term insurance pays out a fixed lump sum if the policyholder dies within a set timeframe, such as the mortgage term or until planned retirement. This type of policy offers a consistent payout amount throughout its duration.
Decreasing term insurance also pays a lump sum, but the payout amount decreases over the policy's term. This is often aligned with repayment mortgages, where the outstanding debt diminishes over time, making it a more cost-effective option than level term insurance.
Whole of life insurance, also known as life assurance, provides cover for the policyholder's entire life, paying out a set sum whenever death occurs. These policies can be more expensive and may include an investment component. They are sometimes used to help cover inheritance tax bills.
Purchasing Life Insurance
Life insurance can be purchased through various channels, including online comparison websites, directly from insurance providers, or via a qualified financial advisor. When selecting a policy, key considerations include finding the best price, determining the appropriate level of coverage, and assessing any existing insurance arrangements, such as employer-provided death-in-service benefits.
Policies can be individual or joint. While joint policies may have lower monthly premiums, they typically offer only one payout. Separate policies, though potentially more expensive, provide two payouts if both individuals die and remain unaffected by relationship breakdowns.
Guaranteed premiums remain fixed for the policy term, whereas reviewable premiums may change. 'Low-start' policies, which begin with lower premiums that increase over time, can ultimately become more expensive.
Writing Life Insurance in Trust
Placing a life insurance policy in trust involves transferring legal ownership to designated trustees. This arrangement can ensure that policy proceeds fall outside the deceased's estate, avoiding inheritance tax, and allowing beneficiaries to receive funds without waiting for probate. This is particularly beneficial for unmarried cohabiting couples. However, making changes to a policy in trust can be difficult once established, and professional advice is recommended before proceeding.
Determining Coverage Needs
The amount of life insurance needed typically depends on factors such as outstanding mortgage debt, funeral expenses, and the desired level of financial support for dependents. For repayment mortgages, decreasing term insurance is often suitable. For interest-only mortgages, level term insurance might be more appropriate. Some individuals opt for higher coverage, even if more expensive, to provide greater financial security for their families, or to account for inflation through increasing term insurance.
Optional add-ons like waiver of premium, which covers monthly payments if the policyholder becomes unable to work due to illness or injury, and critical illness cover, which provides a lump sum upon diagnosis of a serious illness, can increase policy costs.
It is important to check existing benefits, such as employer death-in-service benefits or pension pots, which can be passed on to beneficiaries. Some pension pots will be subject to inheritance tax from April 2027.
Cost of Life Insurance
The average monthly cost of life insurance can vary, with figures suggesting an average around £26.33. Premiums are influenced by age, health, smoking status, and the type of cover. Non-smokers in good health might expect monthly costs ranging from approximately £5 to £35, while smokers typically face higher premiums due to increased risk. Whole of life insurance is generally more expensive.
Joint vs. Separate Policies
Separate life insurance policies offer individual coverage that remains unaffected by relationship status changes and provides two payouts if both partners die, though at a higher monthly cost. Joint policies are generally cheaper, but usually pay out only once, typically upon the first death. This can leave the surviving partner needing to secure a new, potentially more expensive, policy if they wish to maintain coverage.
Comparing Quotes
For straightforward life insurance needs, policies can be similar. However, for individuals with specific medical conditions, thorough market analysis is essential. Obtaining quotes from comparison websites, directly from providers, or through a financial advisor can help find suitable and cost-effective coverage. Some brokers offer services where they waive commission, passing savings onto the consumer, while others charge fees or earn commission, which can impact the policy's overall cost.