Life Insurance

A simple monthly or annual premium can provide a lump sum or income to others when you are no longer able to support them financially.

How much life insurance cover do you need?

It is not really possible to answer this question without knowing more about you, your dependants and your life stage.  The average life insurance pay-out in 2018 was £81,000 according to the Association of British Insurers.  According to the Office for National Statistics the average earnings for UK full-time employees was £30,420 in April 2019. 

This means that a typical full-time employee is only providing his or her family with around three years’ income in the event of their death and that takes no account of any mortgage or other debts that need to be repaid first.

The first thing to do is to identify your life stage.

• childhood – unlikely that any life insurance is necessary

• young unmarried – life insurance is not a high priority.  However, you may wish to take out life insurance to protect your parents against car loans etc in the event of your early death.  Premium rates are low.

• young married – life insurance should be taken out to cover any mortgage and any personal and business debts plus a multiple of your income (say 10 times) to give your spouse or partner time to readjust.  It is also important to be aware that you may be in the next group without knowing!

• young married with young children – life insurance should be taken out to cover any mortgage and any personal and business debts plus a multiple of income (say 15 times) to give your spouse or partner time to readjust and have additional income until your children are no longer dependent.

• married with older children – life insurance should be taken out to cover any mortgage and any personal and business debts plus a multiple of income (10 times) to give your spouse or partner time to readjust and have additional income until your children are no longer dependent.

• post family/pre retirement – life insurance should be taken out to cover any mortgage and any personal and business debts plus a multiple of income (say 5 to 10 times) to make up for a shortfall in pension expectations.

• in retirement – life insurance should be taken out to make up for the reduction in pension income on your death.  Whole of life plans on a balanced basis are often used for inheritance tax planning.

What other situations might need special attention?

There are other situations that you might be in that require special attention as far as life insurance provision is concerned, ie:

• unmarried partners – you cannot assume that the proceeds of a life insurance policy will go to your partner.  There is no such thing in law as a common-law marriage.

• recently divorced or widowed – you will need to review your life insurance cover due to your changed circumstances

• employed – you may have life insurance provided by your employer.  However, you need to be aware that this will be lost if you leave that employer for whatever reason.

• self employed – apart from life insurance needed to protect your family you will need sufficient life insurance for business debts, short term salary payments to any employees and other running costs

• unemployed – you will need to be aware of the possible loss of life insurance provided by a previous employer

• those in high risk groups – if you work in a position where there is a high risk of contracting a disease or having an accident, or you have a poor medical history you need to be prepared for the possibility that your life insurance may cost you more than normal

The difference between insurance and assurance

An insurance policy is designed to pay out on an invent that may not happen during the policy period.  Whereas an assurance policy will pay out at some stage if the policy is kept in force. 

An example is an endowment policy which would pay out a sum on death or at the maturity date.   The technical difference between insurance and assurance is often ignored in the marketing of products.

The most common types of life insurance

• Level Term Insurance (very commonly used).  This would pay out a fixed sum if you were to die within the policy term.

• Reducing Term Insurance (also referred to as mortgage protection).  This would pay out a reducing sum if you were to die within the policy term.

• Family Income Benefit (very under used).  This would pay out a fixed monthly income for the remaining term of the policy if you were to die within the policy term.

• Flexible Whole of life (Maximum and Standard or Balanced Cover) – There is no term as such and this would pay out a fixed sum if you were to die at any time that the policy is still in force.  The premiums for Standard or Balanced cover are expensive but may not need to be increased during your lifetime.  The premiums for Maximum cover are a lot lower and are guaranteed for the first 5 or 10 years of the policy, after which they will increase following regular reviews for the rest of your life.

• Personal Pension Term Insurance (no longer available) – This was a form of level term insurance on which tax relief could be obtained on the premiums because it was issued under pensions legislation. Although this form of life insurance is no longer available you may have an existing policy in force.

Guaranteed rates vs reviewable rates

‘Reviewable’ usually stands for ‘increasable’

‘Guaranteed’ can be misused.  For example some product providers have ‘age costed’ guaranteed rates which means that the rate table is guaranteed but premium rates will increase with age.

Renewable vs reviewable policies

A ‘renewable’ option in a term insurance policy could be beneficial if you decide that cover is required beyond the original policy term.  The premium will be that applicable to your age at that time but medical evidence will not be required.

A ‘reviewable’ policy is one where the premium level will be reviewed by the product provider based on the claims experience and expected mortality (i.e. death rate) of your age group at certain stated times such as after 10 years and then every 5 years thereafter.  Following a review the premiums should be expected to be increased.

Joint life vs single life policies

The cost saving of a joint life policy over two single life policies is low and two single life policies are generally preferred.  The most notable exception is mortgage protection where you just want the mortgage repaid in the event of your or your partner’s death.

With a joint life policy the life insurance cover on your partner’s life is lost on your death and that may not be ideal where you still have dependent children.

You may require a different amount of life insurance than your partner..

If you were to divorce or otherwise separate the joint life policy is likely to be surrendered as being no longer suitable and in that case valuable life insurance cover will be lost.

Putting life insurance under trust

It is generally preferable for life insurance to be placed under trust unless it is to be used to repay a mortgage.  This has a number of important benefits.

• Right hands – the trust makes sure that the policy proceeds are directed to the right person or people

• No delay – the trust means that there should be no delay in paying out the policy proceeds as there is no need to wait for probate

• Inheritance Tax – the trust means that Inheritance Tax should be avoided on the policy proceeds

• Flexibility – the trust can provide the ability for the trustees to change beneficiaries

Using a trust does not need to increase the cost of your life insurance as most life insurance companies will provide a standard trust document for free.

Links to more information

• Life and heath protection
• Putting life insurance in trust
• Health insurance
• Money Advice Service Do you need life insurance?
• If you need personal financial advice on Life Insurance then I am happy to introduce you to Flying Colours Life who have access to independent financial advisers throughout the UK

Important

This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.

If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.