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Thinking about dying isn’t a nice thought for any of us, but it’s a sobering truth that none of us know what’s round the corner.
If anything happens to us, we will want our loved ones to have some financial security to help them on a practical level. Looking after them financially would also give them one less thing to worry about during an emotionally difficult time.
In this article, our experienced team at PIL Southampton looks into life insurance – an effective way that people can financially support their loved ones in the event of their death.
Life insurance, also referred to as life cover or life assurance, is a type of insurance policy that individuals can take out to provide financial support to their dependants if they die.
Its aim is to reduce the financial impact that your death would have on your family.
You pay a monthly premium and, in return, a payment is made directly to your named beneficiaries in the event of your death, either as a lump sum or in the form of regular payments.
How much money your loved ones receive will depend on the level of cover you buy.
You can decide how the money is to be paid out and whether it will be routed to cover specific payments like rent or a mortgage, or if it’s to be left as an inheritance.
Life insurance falls into two main categories; term life insurance policies and whole of life insurance policies.
These run for a fixed period of time, referred to as the ‘term’ of your policy, which could be any length of time between one and 50 years. This type of policy only pays out if you die during the policy term.
You can choose between three types of term life policy:
Level – this pays out a lump sum if you die during the term. It’s seen as the simplest option for life insurance as the level of cover stays the same throughout the term.
Decreasing – this policy is designed to work alongside a repayment mortgage, so the level of cover reduces as the mortgage loan amount decreases.
Increasing – with this policy the level of cover goes up over the policy term, to keep in line with inflation.
This kind of policy doesn’t have a fixed term. It pays out whenever you die, as long as you keep on paying your premiums. People often use this type of policy to help pay for their funeral or for Inheritance Tax planning
These policies are generally more expensive than shorter-term policies and, depending how long you live, you could find yourself paying out more than you get back.
You can choose to take out either a single life insurance policy or a joint policy. Unless you state otherwise, the payout from a joint life insurance policy will go to the surviving policy holder – usually your spouse.
If you have a single policy, then the payout will go to your estate and the money will be paid out to whoever you have stipulated in your will.
It’s worth nothing that, although a joint policy is generally more affordable than a single policy, there is only a payout on the first death. If you buy two single policies, there will be a payout on the event of both deaths.
Life insurance can be extremely useful if you have non-earning dependants, like school-age children, or a partner who relies on your income, or if you are a family residing in a property with a mortgage that you are responsible for paying.
You don’t need life insurance if you’re single, have no dependants or if you have a partner who is financially independent.
Before you take out a life insurance policy, it’s worth checking if you’re covered through work, as larger employers’ employee packages often have death in service benefits that provide an amount of cover linked to your salary. Of course, your loved ones would only receive this payout if you were working for that company when you died.
Many life insurer providers include extra value-adding benefits as part of their life insurance policies.
Of course, as with all policies, each policy will vary so it’s important to carefully read what’s included, and to bear in mind that any additional benefits could be subject to change, but these extras can be a real plus.
They can usually be enjoyed by the policy holder’s family too.
Extra benefits can include access to:
Your monthly premium will depend on a variety of personal factors including your age, occupation, medical history and current health, as well as your lifestyle and whether you smoke.
The cost will also be impacted by the level of cover that you buy and the length of the policy’s term. When you’re thinking about how much cover you need, you’ll want to calculate your mortgage/rent/bills, any debts you have, income from other sources and the number of dependants that will need supporting.
During the term of your life insurance policy, you would be able to increase or decrease the amount of cover you anticipate you’ll need if your household’s financial circumstances change.
There are many different policies available from many sources including banks, insurers, comparison sites, supermarkets, mortgage providers and specialist brokers.
As there are so many life insurance policy options, you might find it helpful to use an independent financial adviser like our expert team at PIL Southampton.
Every day, we are helping clients to find the best life insurance option to suit them, and we really know our way around the market.
Every policy is different, so it’s really important to read the small print and make sure you know what is and isn’t covered, as exclusions can vary.
Remember to sign the ‘nominated beneficiaries’ form that your provider will give you. This dictates who will receive the payout if you die. If you don’t name a beneficiary, your insurer will pay the money into your estate, meaning that it could take a long time to reach your beneficiaries just when they need it the most, and it may be subject to Inheritance Tax.
You will have a 30-day cooling off period with any life insurance policy you take out – if you change your mind within that time you will receive a full refund.
And you must be honest about your medical history. If a claim is made, the insurer will check your details and, if there are any inaccuracies or omissions in your application, your insurer may decline to pay out.
Note: Your life insurance policy is based on your health at the time you take out your policy. You generally don’t have to update your insurance provider if your medical status changes during the term of the policy.
You can cancel your life insurance policy at any time. Once you have cancelled, you will have no cover.
If you shop around and find a better deal elsewhere, then you are free to cancel your current policy and take out a new one. The younger and healthier you are, the more affordable your policy premium options will be.
As you get older, or if you develop medical problems, it could be more cost effective to keep a policy you bought when you were younger.
Next steps
Our expert, friendly team of financial advisers understands that everyone’s situation is unique. We will take the time to get to know you and your personal circumstances, then use our extensive experience and knowledge of the life insurance market to find the most appropriate solution for you.
You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.
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Protection & Investment Ltd is an Independent Financial Adviser which is authorised and regulated by the Financial Conduct Authority [Reg No 222993]
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