thing that now costs less than ever – good life insurance! Intrigued?
Read on …
No-one likes to think about the worst that could happen. But proper
life insurance cover could protect your family, providing them with
the means to cope financially should you pass on. Life insurance cover
is divided into three main types. Here is our jargon-busting guide to
de-mystifying what they are, and what they mean:
· First we have the level term policy. This pays a one-off cash
payment when you die. The amount is agreed when you take out the
policy and does not change.
· An increasing term policy is also known as indexed insurance and the
amount paid out changes with inflation. Some policies of this type may
have premiums that rise with inflation too, but some do not.
· Lastly a decreasing term policy pays out an amount on death that
decreases through time, getting smaller as the policy progresses. A
long-lived customer may even outlive the point where the policy pays
anything at all.
These policy types often form part of loan or mortgage deals. There
are benefits to each type, depending on the loan or mortgage it is
being used to safeguard.
Level term policies are most usually used with interest only
mortgages. This type of mortgage does not reduce the capital you
borrowed with time – you only pay off the interest. When you die, the
capital amount is paid off by the insurance policy payout. Whatever
may happen with inflation, it does not change.
Increasing term policies cost more, but offer protection against inflation.
Decreasing term policies are usually used with repayment mortgages. In
this type of mortgage the capital is paid off along with the interest,
decreasing the amount you owe. This type of insurance has lower
premiums than level term insurance.
Term policy payments can be settled in two ways: either as a single or
"lump" sum, or as "family income benefit". This second method means
that an agreed amount is paid to your family as an income for the
remaining duration of the policy. The method you use affects the cost
of the premium you will have to pay. If you consider that the longer a
policy holder lives, the fewer family income payments an insurance
company will have to make, you can see why this type is cheaper.
So far, we have only discussed insurance for mortgages and loan
payments. These are both useful, but there are other things you can do
to ensure peace of mind.
A typical, average family, it is estimated, will need insurance for
both parents worth at least £150,000 in insurance for each child, in
addition to any death-in-service benefits you may expect ( these
usually come with your employment). Taking the option of family income
benefit, it's recommended that you should allow for an income of
£20,000 to £25,000 a year for each child.
There is another alternative form of life insurance. It pays out a
guaranteed sum on the death of the policy holder (the sum assured),
and is known as whole of life. The terms for this type of insurance
vary.
You can also buy life insurance bundled with your pension fund. This
gives you the opportunity of getting tax relief on the premiums you
pay. A higher rate tax payer can get £100 worth of life insurance for
only £60, which makes this an attractive method to some. On the
downside, higher administration costs for this type mean higher
premiums overall, so basic tax rate payers may prefer to shop around
and compare to make sure they get the best deal.
Some couples take out a joint policy covering both at once, but it's
better to take out individual insurance. The reason for this is that a
joint policy pays out only once, when the first partner dies, but
individual policies pay out for each partner.
We've given an overview of the different policies and what might be
best for you here, but for more in-depth and up-to-the-minute advice
we recommend finding an Internet insurance broker. Surf onto the 'net,
and into a great deal – and peace of mind for you and your family,
hopefully for many years to come!
Get great articles on life-insurance-professionals.co.uk life
assurance from Life Insurance Professionals.
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