What is Life Insurance?

Use this quick guide to help you understand the different types of life insurance.

Term Life Insurance

Term insurance comes in several forms. There is level term which has a guaranteed sum assured and a guaranteed premium. It will run for a finite time which could be anything from one year to fifty years. This is the simplest form of life insurance and the one used in most cases.

It means if you die it will pay out to your chosen beneficiary the sum assured you have chosen at outset. This can be written, like most policies, in Trust to avoid Inheritance tax. That is a subject on its own.

The question you must ask yourself before you take out life insurance is, would anyone suffer financially if I were to die? If the answer is yes. Then you need life insurance.

The question is how much? And which type. Well, you would ideally need enough of a lump sum to be invested at 5% return to equal an income to replace your net income. In other words leave your family financially in the same position as they were before your death.

In the calculation you would deduct any employer death in service benefits and any pension that may be paid to your beneficiary. You would also deduct the mortgage amount as it should ideally be covered under a separate mortgage decreasing term policy. As life insurance brokers we have our own software which works these figures out for you. It takes the guesswork out of the equation.

Mortgage Life Insurance

Mortgage life insurance is term insurance that decreases every year to keep pace with the mortgage that you owe. It will pay out the amount you owe on your mortgage at any time during the term.

Although the sum assured is decreasing each year, the premium remains level throughout the term.

This type of insurance is probably the cheapest to buy because the risk to the insurance company reduces each year.

As in any type of term policy there is no investment content so no cash return.

If your mortgage is on an interest only basis you should elect to take out level term.

Even within these types of policy there are add-ons for example:

Waiver of premium. This means if you are off work sick for more than six months the insurance company will pay the premiums on your behalf until you return to work or the policy ends.

Critical Illness. If you have one of the designated serous or critical illnesses of which there are circa thirty two, the policy will pay out. The policy, as in a death claim, would then end.

Income Protection Insurance

To my mind the most important of the range of insurance protection products. Let’s face it if you are of work sick and you are on Statutory Sick Pay (currently £83 per week), everything else fails.

The mortgage doesn’t get paid, the car payments fail and the fact is you are in financial trouble.

Income Protection pays out a monthly payment of up to sixty five percent of your gross pay. This payment is currently tax free.

You can defer your claim from one day to one year. It depends on how long you can do without your income. You may have savings or your employer may pay you for six month or even one year. That is when you would want the policy to kick in.

It doesn’t matter how many claims you have or if you are off work with an illness you had previously claimed for you will be covered. This differs from critical illness as you could well be off work because of an accident which critical illness would not cover.

This type of policy normally runs to your retirement or you cease work. Again there is no investment value so no return. You can link your sum assured to inflation so that the pay-out will increase over the years with your income. This is probably the most undersold policy in the market.

Whole of Life Insurance

Unlike term insurance Whole of Live insurance does not have a defined term. It will run until the insured dies. This type of policy has fallen out of favour in recent years because of the steep increase in premiums at five and ten year anniversaries where the actuary will determine the premium for the next period. It is still useful however in mitigating inheritance tax as it is geared to run until the assured dies.

It is written in trust by the settlor to avoid tax and the sum assured is paid to the beneficiary through the trust which in turn is used to pay the IHT bill to the HMRC.

All of these policies are complicated in their own right and it is imperative that the right one is chosen as the wrong one can do more damage financially than good.

Financial Advisers are trained and qualified to give you the best advice on this very important subject and you would be well advised to take professional advice before you proceed.

Want to know more?

Call: 02825 898625 or email: info@mortgageoptionsni.co.uk

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