Guide to Life Insurance

Life insurance is a form of financial protection. It is designed to pay an agreed sum of money to those you care about in the event of your death.

The purpose of life insurance is to provide money to those you leave behind, who might otherwise struggle to support themselves, or who would be negatively financially impacted by your death.

While it sounds like a simple policy in principle, life insurance can feel complicated because there are different types of life insurance, with different benefits and drawbacks, and different costs attached.

In return for paying premiums (regular contributions), your life insurance provider agrees to pay out either a lump sum or regular payments to your beneficiaries if you die during the term of the policy.
The term ‘beneficiary’ simply means a person who will benefit from the life insurance payout. When you set up a life insurance policy, you will need to choose who you want the beneficiaries of your policy to be. You can either choose one person, such as your partner or spouse, or a group of people, such as your children.

When you take out life insurance, you’ll need to consider:
Who the beneficiaries of your life insurance policy should be: who might suffer financial hardship as a result of your death?

The cover amount: how much would your family need to cover their bills if you weren’t there to support them? What debts and expenses would they need help with now and in the future? (If you have young children, you may want to consider future higher education costs, for example.)

How long would you like the policy to last for? A set number of years? As long as your mortgage lasts? Or for the rest of your life?

The answer to some of those questions will help to determine which kind of life insurance policy will best meet your needs.

Life insurance policies can be split into two main categories:

• Term life insurance
• Whole of life insurance (sometimes known as life assurance)

They differ in how they pay out, and how much they cost.

Term life insurance

Term life insurance runs for a fixed period of time, for example, 25 years. These policies only pay out if you die during the term of the policy.

There are three types of term life insurance policies:

• Level – With this type of policy, the payout amount remains level throughout the term of the policy. Whether you die at the beginning, or towards the end of the policy term, the amount your beneficiary receives will be the same.
• Decreasing – With a decreasing term policy, the level of the payout reduces as with each year of the policy. It’s often used alongside mortgages, where the amount outstanding on your mortgage also decreases over time.
• Increasing – With this type of policy, the payout level rises over the term of the policy, to keep up with the effects of inflation.

Pros

• Cheaper than whole of life insurance
• Different types of term insurance mean you can choose a policy with premiums to match your budget
• Provides peace of mind that your loved ones won’t be left to cope with big, unaffordable debts such as a mortgage, in the event of your death

Cons

• Cover only lasts for a fixed period of time
• No cash value: if you don’t die during the term, you won’t receive anything back
• Renewing or starting a new policy as you age results in increased premiums

Whole of life insurance policies

A whole of life insurance policy guarantees a payout. It lasts for as long as you keep paying your premiums and will ensure a set amount is paid to your beneficiaries at the time of your death, whenever that is.

These kinds of policies can be helpful for those who are worried about their relatives’ ability to afford funeral expenses or Inheritance Tax, for example.

Unlike term life insurance policies, whole of life policies can include an investment component which means that some of your premiums are invested over time. Policyholders can then release these earnings as cash, or even borrow against them, although doing so might reduce the death benefit.

Pros

• A guaranteed payout, whenever you die
• Do not expire: they last for as long as you keep paying premiums
• Peace of mind for relatives that they can cover expenses such as Inheritance Tax / funeral expenses
• You can borrow against the policy’s cash value, or withdraw it
• Some policies include a withdrawal clause that enables you to receive a cash surrender value if you choose to cancel the policy

Cons

• More expensive than fixed term policies
• You could end up paying in more than is paid out

Yes, you can switch from a term life insurance policy to a whole life policy. It’s a process known as conversion. Converting will likely change the price of your premiums, however, and you may need to undergo a medical examination to take out a new policy.

The cost of whole life insurance is determined by various factors including:

• The type of policy you opt for
• Your age
• Your health and family medical history
• Your lifestyle (including whether you smoke and how much alcohol you drink)
• Your occupation (high risk roles may push your premiums up)
• The size of the payout you wish your beneficiaries to receive upon your death

Yes, you can take a Life insurance policy out in joint names.

A joint life insurance policy can be taken out to cover you and another person (usually your partner or spouse, but it could be a business partner) under a single policy. As one premium is paid instead of two, it can be cheaper than taking out two separate life insurance policies.

However, something to consider is that while joint life insurance covers two people, it usually only pays out when the first person dies. Terms and conditions vary from provider to provider, however, so it’s worth shopping around to find a policy that suits you.

There is no option to withdraw any cash from a term life insurance policy – it only pays if you die within the term of the policy.

Whole of life policies are slightly different. These policies sometome allow you to withdraw funds, borrow against the cash value within it, or use the cash value to pay your premium.

Insurance policies are only valid as long as you continue to pay your premiums. If you stop, the policy will be terminated. If you are in financial difficulties, however, and struggling to afford your premiums, speak to your insurance provider as there may be alternatives to cancelling the policy. Some providers allow payment breaks, and there may be a possibility of transferring to a cheaper plan that means you don’t lose your cover altogether.

If you are struggling to decide which kind of life insurance is best suited to your needs, or your personal financial or family circumstances are particularly complicated, it is best to speak to a protection specialist who can guide you through your options and make recommendations.

The selling of life insurance is regulated by the Financial Conduct Authority (FCA), so always make sure that the firm you seek help from is registered with the FCA.

Anything we haven’t covered? Get in contact and let us know.