Life Insurance

ONE OF THE FEW CERTAINTIES IN LIFE......

Nobody wants to think about death, but it is one of the few certainties in life (if you see what I mean).

The fact is that our loved ones are likely to need financial support after we have passed on, particularly if they are still young or financially dependent. Coming to terms with the loss of a loved one is bad enough without adding financial burdens to the emotional grief.

Not everyone needs Life insurance but there several reasons why you might. These could include:

• Paying off the Mortgage.
• Replacing the primary earner’s salary – ensuring the family does not fall on hard times after your death.
• Replacing childcare –often overlooked, the death of the primary childcare provider could lead to the need for childcare expenses.
• Education expenses – cover for school / university fees after the death of the primary earner or childcare provider.

Different types of life cover

Life insurance (also known as ‘life assurance’ or ‘term assurance’) is a the simplest type of policy which pays out a lump sum in the event of the policyholder’s death, with the purpose of protecting loved ones and dependents against financial hardship.

It is usually available on a single or joint life basis. If the policyholder is alive when the policy expires no payment is made and, should the policyholder stops paying premiums at any stage, the policy has no value.

There are several variation of this type of life insurance but the following two are most common:

• Level term asssurance - designed to pay out a sum of money if the policyholder should die during the policy’s term. The sum assured is guaranteed and remains unchanged throughout the term.
• Decreasing term assurance (also known as mortgage protection cover) – where the sum decreases during the policy in line with the capital and interest repayments on a mortgage.

It is also possible to have:

• Renewable term insurance – On the expiry date there is an option to continue without a health review.
• Convertible term insurance – Level term insurance with the option to revert to whole life or endowment insurance.
• Increasing term insurance – Due to inflation the value of money declines each year. Consequently, this form of insurance combats that with an escalating sum assured.
• Index linked term insurance – Some insurers provide the option for the premium to be increased each year in relation to the Retail Price Index.

Another useful variation is Family income benefit.

• This means that the payment on your death will be given to your family in regular payments rather than as a lump sum. The term is chosen at the outset of the policy. So, for example, rather than trying to work out how much lump sum cover your dependants might need, you could choose a level of income to be paid, e.g. £25,000 p.a. until your youngest child is 21    

There are usually two types of premium available for all the above types of policy – guaranteed or reviewable:
 

• Guaranteed Premiums – The life insurance company guarantees to never increase your policy premium.
• Reviewable Premiums – You agree that the company can review your policy at set intervals.

Initially the reviewable premiums will work out cheaper. However, over time these premiums are likely to be increased and therefore the overall cost will surpass that of the guaranteed premium. So generally, guaranteed premiums will work out as a better buy in the long run, but if you are on a tight budget the reviewable premium presents a better short-term option.

And finally: Some people don’t like the idea that they may not actually claim during the term of the policy (no pleasing some people !) and for them there is ‘Whole of life’ insurance. This guarantees the payout of a lump sum when the policyholder dies, at whatever time that may be as long as payments are maintained. However, they are more expensive as a claim is assured.

Although the basic premise behind life assurance is simple, there is complexity in the detail and careful planning is required to ensure that you have the correct level and type of cover. If you need further advice contact us now: The IFS Group