Life Insurance
| Estimated Probability of Someone aged 30 Dying by Various Ages |
|
by age 40 |
by age 50 |
by age 60 |
| Male |
1 in 83 |
1 in 28 |
1 in 11 |
| Female |
1 in 167 |
1 in 48 |
1 in 18 |
| Source: Candid Money, estimates calculated using GAD Interim Life Tables. Estimates do not reflect changes in future life expectancy. |
What is it?
It's an insurance that pays out a tax-free lump sum, or regular income, to one or more people when you die.
The amount paid out is called the 'sum assured', which you decide on when you start the policy. The higher the sum assured the more the policy is likely to cost.
The person(s) who is due to receive the payout upon your death is called a beneficiary.
It's almost always a good idea to ensure that any payout will be passed directly to the beneficiary and not into your estate, where it might be subject to Inheritance Tax. This also
means they should get the money more quickly. To do this make sure that your life insurance policy is
'written in trust' using a flexible trust (that lets you
change beneficiaries in future if you wish). All life insurance companies should supply the necessary form free of charge.
Do I need it?
If you have at least one person who is financially dependent on you then life insurance would probably be a good idea. Ask yourself whether they could cope
financially without you.
If you have no financial dependents then chances are you don't need any cover.
Single or joint life?
Policies can either be taken out on single or joint lives, e.g. just yourself, or you and your partner. If joint life then you choose whether it pays out on the first
or second death.
A joint life first death policy could be appropriate if your spouse would need the money to live on in your absence. A second death policy could be more appropriate
if the money is intended to pass to children or help fund an inheritance tax bill.
Types of life insurance
Term AssuranceFamily Income BenefitWhole of LifeEndowments
This is the simplest, and for many the most attractive, type of life insurance. You choose a sum assured and the period of time, i.e. 'term', you want the policy to
last for (usually up to 40 years subject to cover not passing beyond your 80th birthday) and the insurer then charges you a fixed monthly premium throughout the term.
If you subsequently decide that you no longer require cover you simply cancel the policy and stop paying premiums, normally without penalty.
As well as the level term assurance described above, increasing and decreasing policies are available too. Increasing means the sum assured increase each year,
usually inline with inflation (i.e. index-linked). Decreasing policies reduce the sum assured over time, usually inline with the balance on a repayment mortgage.
Note, some policies have 'reviewable' premiums which can change over time. Guaranteed, i.e. fixed, premiums are normally more attractive as there can be no hidden
surprises.
A type of term assurance that pays out a regular tax-free income on death rather than a lump sum. This can be useful if the beneficiary would be bewildered to receive
a large lump sum on your death.
This is the only type of life insurance that guarantees a payout, in so far as the policy can run until you die whatever the age. However, costs tend to be somewhat
higher than term assurance.
There's an added complication because whole of life policies normally invest your premiums (which can make the insurer more money still!) then take the cost of the
life insurance from your investment fund. If investment performance is poor your premium may subsequently rise to cover any shortfall. This does mean that if you cancel
the policy there may be some money left in the investment fund for you, but if you view whole of life as an investment you'll be probably be very disappointed.
Depending on the insurer and value of your investment fund, premiums might be payable until you die or could cease at a certain age.
Endowments are a type of investment that also provide life cover and are often linked to mortgages. In many cases they have proved a poor alternative to term
assurance coupled with an investment such as a unit trust.
Endowment policies were sold heavily in the 1980s and 1990s due to the high commissions paid by insurance companies to salesmen, but have since earned a bad
reputation thanks to high charges and poor investment performance leaving thousands of people with insufficient money to pay off their mortgage.
Think very, very carefully before buying one of these policies.
How long might I live?
How long is a piece of string? Your actual lifespan will depend on numerous factors. However, you can use our
'How Long Might I Live?' Calculator to estimate your life expectancy based on average figures.
How much cover?
The best way to answer this is to consider all the people who are financially dependent on you and estimate how much they'd need need to get by if you weren't here.
You should also include any debts, such as a mortgage or loans, and the cost of a funeral. The cover should last for as long as you'll have financial dependents.
A very simple rule of thumb is cover of ten times your annual income, but much better to calculate a more accurate figure using our Life Insurance Cover Calculator.
Once you have an idea of your ideal amount of cover you can then get quotes and, if necessary, trade off cover versus cost to find an affordable compromise.
What affects cost?
The cost of a life insurance policy tends to be most affected by the following:
AgeSexHealthFamily HistorySmokingOccupation/Hobbies
The older you are the more likely you'll die during the policy term, hence higher premiums.
Premiums tend to be lower for women because they live, on average, longer than men.
If you suffer from health problems and/or are overweight your premiums might be higher than normal.
If you have a history of medical problems in your family, e.g. heart disease or cancer, your premiums might increase.
Premiums for smokers can typically be around double those of non-smokers.
If you have a dangerous occupation or hobby then expect higher premiums. Some insurers might even refuse to insure you.
Will your weight affect your life insurance premium? Use our Mass Index Calculator to find out.
Underwriting
When you complete a life insurance application form you normally have to provide details of your health and family health history. The insurance company will then
decide whether to insure you and, if so, whether to increase your premium from a normal level. This process is known as 'underwriting'.
As part of the underwriting process the insurance company might require you to see or speak to a doctor or nurse to gather further information.
Some insurers have a level of cover, called a 'free cover limit', below which no underwriting is required, so you don't need to provide any details about your health.
This is especially common in 'group' life insurance schemes offered via employers.
Do I already have cover?
Before you buy life insurance double check you don't already receive cover through your employer, often called a 'death in service' benefit. If you do receive cover
double check it's sufficient.
A good idea for covering inheritance tax bills?
Some people take out a life insurance policy to help pay towards a potential Inheritance Tax (IHT) bill when they die, easing the burden on their beneficiaries. If
you take this approach you'll need a whole of life policy; term assurance doesn't work because the policy could end before you die.
It's vital this type of cover is written in trust so that the payout on death does not pass into your estate.
While reducing the IHT burden on beneficiaries appeals to some, this can be an expensive route to avoiding tax and is best viewed as a last resort. Other routes to
avoiding IHT are generally preferable, read more about IHT here.
Ways to buy life cover
InsurerFinancial AdviserDiscount Broker
Most insurers offer term assurance and whole of life policies direct to the public. However, the costs may be higher than using a discount broker. Buying direct is therefore not usually the cheapest
route.
If you buy life cover through a financial adviser you'll need to pay them a fee for advice, adding to your overall cost.
There's little need for financial advice when buying term assurance as it's a very simple product. Just make sure the policy is 'written in trust' if appropriate (see details above),
ensure the premiums are fixed and spend a little time working out how much cover you need. Using a discount broker to then find you the best deal should save you money.
The most sensible option for buying term assurance. Work out how much cover you need and get a discount broker to find the most competitive quote for you. The broker
will either refund some commission as a cashback or waive commission to reduce the monthly premiums. Ensure the policy is 'written in trust' if appropriate (see details
above).
The best deals are usually via discount brokers who waive all commission and simply charge a one-fee of around £25 - £50 instead.
Life Insurance Jargon
Here's some of the more common life insurance jargon you might come across:
| ABI Model Definitions | A list produced by the Association of British Insurers that aims to standardise what is meant by 'critical' when applied to a specific illness. |
| All Risks | Contents insurance with all risks covers possessions such as a laptop or watches when taken outside the home. |
| Building Insurance | Insurance that intends to provide sufficient cover to totally rebuild your home if necessary. |
| Contents Insurance | Insurance that covers items that are not a fixed part of your home, e.g. TV, from damage or theft. |
| Convertible Term Assurance | A type of term assurance that allows you to convert into a whole of life policy. |
| Debt Payment Protection | Insurance that's intended to help you manage your debts if unable to work through illness or injury. |
| Decreasing Term Assurance | A type of term assurance where the sum assured reduces over time, typically linked to a repayment mortgage. |
| Deferment Period | Period of time that you must be unable to work for before you can claim on an income protection policy. The longer the period, the lower the premium is likely to be. |
| Employment & Support Allowance | State benefit intended to pay employees (and potentially the self-employed) unable to work through illness after Statutory Sick Pay ends. |
| Endowment | A type of life insurance policy that is also intended to provide investment returns. They have a very patchy track record. |
| Excess | The amount of an insurance claim you agree to pay before an insurer pays the rest (for example, the first £50 of a claim). |
| Exclusions | Insurance policies often exclude certain risks or events. It's vital you check these before buying a policy. |
| Family Income Benefit | A type of term assurance that pays out a regular tax-free income on death rather than a lump sum. |
| Full Medical Underwriting | When you buy private medical insurance the insurer asks for full details of your medical history and may also contact your doctor for more information. |
| Income Protection | Insurance that pays out a monthly tax-free income if you're unable to work through illness or injury. |
| Increasing Term Assurance | A type of term assurance where the sum assured increases over time, usually inline with inflation. |
| Inpatient Costs | The costs of staying in a private hospital, usually covered by private medical insurance policies. |
| Loss Adjuster | An impartial claims specialist responsible for investigating claims on behalf of insurance companies. |
| Material Fact | Information that would affect an insurance company's willingness to accept a policy, or the premium it would charge. Don't omit these when applying for cover as it could invalidate the policy. |
| Moratorium Underwriting | When you buy private medical insurance the insurer does not require details of your medical history. Any conditions that have existed over the last five years are not usually covered. |
| Outpatient Costs | The costs of private medical care when you're not admitted to hospital. Not always covered by private medical insurance policies. |
| Personal Accident Plans | Insurance that pays out a lump sum in the event you have an accident and suffer a permanent or temporary disability. |
| Premium | The money paid to an insurance company for an insurance policy. |
| Private Medical Insrance | PMI, a type of insurance that pays for you to receive private health care. |
| Statutory Sick Pay | State benefit that pays employees if they're unable to work for at least four days in a row. Lasts for 28 weeks. |
| Sum Insured | The maximum amount an insurance company will pay for a claim. |
| Term Assurance | Simple type of life insurance that offers cover for a fixed period of time for a (usually) fixed monthy premium. |
| Underwriting | The process where an insurance company decides how risky it would be to insure you and how much to charge you for cover, assuming they're prepared to insure you. |
| Whole of Life | A type of life insurance that can run until you die, however old you might be. However, premiums tend to increase over time so it can become very expensive. |