As the Christmas season of “joy and peace” approaches, our thoughts may also turn to the peace of mind we gain from ensuring that our family is provided for, if we have the correct life insurance cover in place.
Life insurance
Life insurance is a policy which pays out a lump sum to others when you die. The person or persons nominated by you to receive the money are known as your “beneficiaries”, as they benefit from the insurance.
The most common use of life insurance is to provide funds for your family, as they will be deprived of your income in the event of your death. There are two ways to offset this loss, using life insurance.
Whole of life insurance cover
First, your family can benefit directly from your life cover, by simply having the money paid directly to them from a whole of life insurance policy.
This life cover can be taken as a single life policy, or as a joint life policy covering a couple, which pays out once when the first of the couple dies. However, even as a couple it can be worthwhile considering taking two single life policies, as the surviving spouse continues to have cover which can then be paid out to your children.
Term insurance
The second option to relieve your family of a financial burden when you die is to have a term insurance policy, set up to pay off your mortgage.
Term insurance is so-called because it provides cover for a specific time span or term - in this case, the term of your mortgage. The level of cover reduces over time, in step with the balance owing on your mortgage, and if you live to pay your mortgage off, the policy then expires without paying out.
Term insurance is generally cheaper than whole of life cover, due to this possibility that it may never have to pay out, whereas with a whole of life policy, an eventual payout is inevitable.
Life insurance in trust
At the point of taking out life cover, it is wise to discuss with your adviser the option to set up your life policy in trust. This simple arrangement will reduce the likelihood that you will pay Inheritance Tax on your life cover, and will also ensure a faster and more efficient delivery of the funds to your beneficiaries or family.
Other life issues
A number of other issues arise when considering the various life insurance options available.
What type of life premium?
Some life policies have guaranteed premiums, while others have premiums that are reviewable.
Guaranteed premiums remain constant, while reviewable premiums can change or be increased. Insurance companies offering ’special offer’ deals of low-cost cover often offer reviewable premiums, which they raise at a later date. As a result, they may not represent the better deal in the long term.
Flexibility in your life cover
Life insurance, to state the obvious, is a product you buy for life. It needs to be adaptable, to suit your needs as your circumstances change over time.
Ask your adviser to check that your life policy includes guaranteed insurability options, which allow you to increase your cover, as many people wish to do when they marry or start a family.
Another flexible option in some life policies is ’terminal illness benefit’. This offers you an early payout in the event that you are diagnosed as having less than 12 months to live. Although you normally sacrifice part of your cover to have this early payment facility, it can be invaluable, as you put your affairs in order.
Use a financial adviser
Life insurance is a contract like any other, and it is essential to understand the terms and conditions contained in the ‘small print’. The guidance of an independent financial adviser is worthwhile, both in understanding your policy, and in comparing the wide range of life policies on the market. Get independent life insurance advice
