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Life insurance

Useful information about life insurance cover with advice on term and whole of life insurance policies.
Life insurance is designed to provide financial support for your family after your death. Although its not a particularly nice thing to think about, having a quality life insurance policy in place will give you the peace of mind that should the worst happen, your family will be provided for.

Initially, you will need to establish how much life cover you will require. Many people simply choose to cover the amount remaining on their mortgage, however it is important to consider whether your family would be able to maintain their standard of living without your contribution to the household (both financial and practical) and increase the cover accordingly.

Things to consider
  • Outstanding mortgage amount and term
  • Other outstanding loans or debts
  • Replacing salary income - this is usually worked out on the basis of net income over the number of years it will be needed to maintain your families standard of living i.e. until your youngest child reaches the age of 18 etc.
  • Education costs - including school and university fees
  • Childcare costs
  • Inheritance tax
  • Emergency funds
There are two categories of life insurance available, these are Term cover and Whole of Life cover.

Term Life Insurance

Term based life policies pay out a lump sum in the event of your death within a specified period. Many people specify the term of cover to match the length of their mortgage while others choose a term which provides cover until their youngest child reaches adulthood. Term policies tend to be the simplest and cheapest form of life insurance and you remain covered as long as you continue to pay the monthly premiums (however if payments stop, cover will also stop). After the specified end date a term policy will expire, after this date you will no longer be covered and premiums will not be reimbursed if a claim has not been made.

There are a variety of different types of Term based life insurance policies available, these include;
  • Level - With a level term policy, the amount payable in the event of death is a guaranteed amount that remains the same throughout the duration of the policy.
  • Decreasing - With a decreasing term policy, the amount payable in the event of death decreases by a fixed amount throughout the duration of the term. This type of insurance is commonly used to cover mortgage or loan payments.
  • Increasing - With an increasing term policy, the lump sum payable in the even of death increases by a fixed amount throughout the duration of the term. Increasing term policies are designed to combat inflation. With an increasing term policies it is important to bear in mind that the premium may increase too.
Whole of Life Insurance

These policies are designed to cover you for the whole of your life and pay out a lump sum to your dependents when you die. These tend to be more expensive than term insurance policies as the insurance provider will have to pay out at some point. Some policies require you to pay premiums until the date of your death whereas others only require you to continue premium payments until you reach a certain age (often retirement age) but continue the cover.

The premium payable for your life insurance cover will depend on a number of factors including age, sex, type and period of insurance and whether you smoke. Other options such as critical illness or accident, sickness and unemployment cover (ASU) can be added to many policies, however these will be at an additional cost.

When choosing a life insurance policy it is best to carefully consider the level of cover you require and then shop around for the best monthly premium. If you have any questions or queries about life insurance policies it is always best to discuss them with a financial expert.

A useful resource to find suitable life insurance cover can be found at FinanceLink.

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The key thing with life insurance is to ensure that the policy is written in trust. In essence, this means that in the event of death, the funds are not delayed through probate, and the money generally will not form part of your estate for Inheritance Tax.

I am an IFA (independent financial adviser) and find that the cheaper life cover providers - such as supermarkets etc, do not assist clients with writing the policy in trust. If this is not properly done, apart from the anguish and delay in the funds being available, the chancellor could help himself to 40% of the sum assured - which all of a sudden, doesnt seem quite as cheap.
by JMSquibb 28th Jan 2008, 6:10pm