Gone are the days of good old £100,000 over 25 years one size fits all policies. We now live in an era where your protection portfolio can and should contain several elements to it for two main reasons.
- Cost – The costs of addressing the needs individually is somewhat cheaper than with one big policy over a longer term
- The accuracy of cover – It’s all very well guessing at the level of cover you need but wouldn’t it make more sense to be more thorough and meaningful with the figures.
Don’t be put off or afraid by the above statements it sounds like a lot of work and it really isn’t. Before I get to the main FAQ’s surrounding protection I feel it’s appropriate to advise you that and good protection advisor will be able to create a bespoke solution for your circumstances and needs.
It does pay in not the longer term and the short term to seek advice, and in this area, there are normally decent quality, experienced advisers that will do this for no fee.
What does life insurance cover?
In its simplest terms life insurance pays out a sum of tax free money within a specified term (lump sum or regular amounts) in the event of the policy holder dying (or being diagnosed with a terminal illness – I.e. an illness that is likely to cause death in the foreseeable future) – Generally it can be used to cover a mortgage balance, everyday expenses of the family that have been left, leaving legacy, paying funerals, and inheritance tax (IHT for the wealthy). You can also get whole of life (WOL) which has no end date.
What determines the cost of insurance?
The main things that dictate the original cost of an insurance policy are – age (the older the more expensive), the level of cover (the higher the more expensive), the term or length of the policy (the longer the more expensive) – A combination of these will give a base quote. The cost of the policy may be further increased or “rated” by things such as a smoker premium (rule of thumb smokers pay around double that of non-smokers), health questions such as BMI, current and past treatments, family history etc.
Should I bother with life insurance?
If you are young, single with no kids and no property – Then the likely answer is No. If you have family, a mortgage, a business or any other debts or assets then the answer is most probably yes. In general, if your death is going to negatively affect someone from a financial stand point then it is an area which should be at least considered.
Does it pay out the same amount no matter when I die?
This depends on the type of policy – there are three main types – Level (pay-out stays the same amount within the policy term), Decreasing (reduces – Can be in line with a debt such as a mortgage or by a fixed regular amount like a Family Income Benefit (FIB)), or the sum assured can actually increase (can be index linked to combat the effects of inflation). The costs of these are different with a term policy on a decreasing basis being the cheapest and an increasing sum assured being the most expensive.
Does it pay out whenever I die?
If you opt for a Whole of Life (WOL) policy then the answer is yes, but these can be extremely expensive. There are term plans which can run until the age of 90 years old, and these can be considerably cheaper that the WOL. A term plan is set over a predetermined period, a term. If there is no claim during this term then the policy will naturally end and the premiums will not be returned, nor is there any surrender value accumulated during the term of these plans.
Are my premiums fixed every month?
If you opt for a guaranteed policy then the premiums will be fixed for the life of the policy, so too will the sum assured amount. If you opt for an index or inflation linked policy both the premiums and sum assured will increase yearly by a fixed amount – normally 2-5% or even linked to inflation or the CPI (consumer price index). This type of policy is ideal when it’s an income based policy such as a FIB which needs to outpace or keep up with the effects of inflation. Many providers will allow you to skip years increases or even stop the increases altogether if the policy is becoming too costly. You can also opt for a reviewable policy which offers lower premiums to start with but then will have reviews which will normally result in increases – Some annually, some after 5 years and then annually etc. These can be effective for someone perhaps just starting out in a career with expected salary increases but who need an elevated level of cover now.
How much cover do I need?
As you go through your life your insurable needs may change, perhaps you buy a property, change jobs, get promotion, get married, have children. These things and more can influence the level of cover you need, likewise the length of time you need protecting will be different – Your mortgage may be over 40 years but it’s unlikely that any children are still going to be financially dependent in 40 years’ time, and this is where the portfolio planning can come into it. If you are just looking for a straight forward fixed amount of cover you can arrange this on non-advised basis via an adviser or yourself online, where if you have no idea or you are not too sure then seek guidance and advice – The old saying “you don’t get two chances to make sure you have enough cover” is a true one, very few people are over insured but many underestimate the effect of losing a partner so its vitally important to get the figures right.
Will my family need to pay tax on my insurance?
Proceeds from a life insurance policy are exempt from Capital Gains Tax (CGT) and Income Tax. However, they will be counted as part of your estate meaning they may be liable to Inheritance Tax (IHT). As of writing (Oct 2017) the nil rate band for a single person is £325,000 – meaning anything you leave over £325,000 is taxed at 40% – There is no IHT between spouses. A protection adviser can also discuss writing your policy into trust thus removing the pay out from your estate.
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