Here at Free Price Compare we provide clear and no-nonsense financial commentary on the topics that really matter. Read on for our guide on life insurance and why it may be worthwhile to have more than one policy.
Firstly, what is life insurance? Life insurance can be defined as an insurance policy that pays out a sum of money either after a set period or upon the death of a person. It is one way of providing financial support to your family after your death, with some of the most common reasons being to replace lost income (either pension income or employment income) or to pay off large debt such as a mortgage (you could think of it as mortgage insurance).
Premiums are paid on a monthly basis to maintain your life insurance policy and depending on the type of policy, the premium can go up or down (more on that later). The life insurance rates will also be determined by a range of other factors such as your age, health, lifestyle and the value of the lump sum required at the end of the policy.
If you have family members or other people close to you who would be financially worse off after you die, life insurance can protect them from getting into financial difficulty. For example, could your partner afford to pay the mortgage on their own? If there was only one parent around to look after the children, would this result in increased childcare costs? On top of grieving, you don’t want your loved ones to be grappling with financial problems after you pass away.
Only one in three people in the UK has life insurance according to dontdisappoint.me.uk and furthermore, over 25% of UK households with mortgages don’t have life insurance. It may not be something that is needed depending on your lifestyle, for example, if you have no children or spouse/partner, but if you do, make sure you take the time to think about what the financial impact of your death on your loved ones would be.
The main types of life insurance are term assurance, family income benefit policies and whole of life policies.
Term assurance, or term insurance, is the most basic type of life insurance, which works by first choosing the amount you want to be covered for and the period you want to cover. If, during the policy term, you die, then the policy will pay out. However, if you do not die within the term, the policy won’t pay out and all the premiums paid will not be returned. So choosing the correct policy length is key!
This type of insurance life is known as a decreasing term policy. The pay out received by your beneficiaries gets smaller over the life of the policy. This type of policy is a popular choice for those who have a large debt to pay off, which reduces over time, such as a mortgage. The idea is that as years pass and the mortgage amount outstanding reduces, a smaller pay out will be needed. As with term assurance, if you die after the policy term has finished, there will be no pay out and the premiums paid will not be returned.
Whole of life insurance policies are a type of “permanent insurance” and are ongoing over your lifetime and will pay out to your beneficiaries whenever you die. This type of policy is usually more expensive than term assurance as it is guaranteed that the insurer will have to pay out and can be considered insurance for life.
Within whole of life policies, there are two main types:
Balanced cover means the premiums will stay the same over the life of your policy, regardless of how old you get or how your health may deteriorate. You have surety of how much you will pay each month until you die, and the fixed cash sum paid out is also fixed.
Maximum cover policies are linked to an investment fund. The insurer will invest the money you pay each month with the aim that the returns generated from the investment are sufficient to cover the pay out to your beneficiaries. Your premiums will be regularly reviewed and may go up if the investment fund isn’t performing as well as hoped. This can also affect the size of the final pay out. Maximum cover policies can look attractive as premiums may seem lower to start with, but remember they can increase and could even result in the policy becoming unaffordable.
One of the main benefits of taking out joint life insurance is that it can be cheaper than taking out two single life insurance policies. This is most common with couples who wish to protect themselves and can also be used to protect a business partner.
However, even though joint policies apply to both parties, they usually only pay out on one death. The first death will trigger the lump sum pay out, but there is the option of setting the policy up so that the pay out will be after the second death.
There are advantages of having a single policy over a joint one, however. You wouldn’t have to change or cancel the policy if you and your partner split up, for example. Also, your cover will continue even if your partner dies and your beneficiaries will get two lump sums if you both pass away during the policy term.
You absolutely can have more than one insurance for life policy. One of the most common scenarios could be having one policy that covers you as an individual and a second policy that provides joint cover for you and your spouse. Another example is if you’re a business owner, you might want to protect your company by taking out “key person insurance” that will pay out to support your business in the event of your death. However, in many cases, it can be more cost-effective (not to mention easier) to change the terms of a single life insurance policy than to take out multiple policies, so make sure you check this avenue first before purchase further policies.
There is no legal limit on how many life insurance policies you can have in the UK, but as we mentioned above, explore whether you can change the terms on your existing policy to suit your needs first.
Temporary multiple policies – imagine there is a scenario where you need more coverage, but it’s only temporary. Examples include only needing an extra policy to cover the mortgage term. When it’s paid off, the need for that coverage falls away. Another example could be if one partner is temporarily out of work. Maybe they are taking time out to study, so while they are not working, the other spouse is taking on more of a financial burden, and if they were to die, the other party would be vulnerable financially.
Overlapping terms – Term insurances only cover a set period. When that ends, you may want to take out another policy, but the longer you wait, the higher the premiums are likely to be. You may choose to take out another policy before the current one ends in order to secure more favourable premiums, but you will only have more than one for a set period of time.
Boosting a work life insurance policy – Many employers provide affordable life insurance to their workers, as they can get cover on a large number of individuals which works out cheaper than for individual policies. However, this may only offer a more basic level of cover and may not be enough for the needs of your family, so you may want to purchase an additional policy to “top up” your existing one. Also, if you leave your job, you are unlikely to be able to move the policy with you, so you may want a permanent one alongside the work one.
Supplementing a permanent policy – A permanent, or whole of life policy provides cover until you die. You may want to combine a permanent policy with a term insurance policy to provide both coverage in general for your loved ones after you die and extra coverage while your children are young. Once they are adults, you can let the additional cover fall away in the comfort that they will be grown up and hopefully able to sustain themselves.
You can have more than one beneficiary on your policy and they can be under 18, but they cannot personally claim their pay outs until they reach adulthood. If the money is needed to live on before that, it can be managed through a guardian who is an adult.
Whether you’ll have to pay inheritance tax depends on the value of your estate. It is advisable to check using one of the many online calculators to work out whether you are likely to fall into this category.
One way to avoid inheritance tax is to have your life insurance policy written ‘in trust’, which means that assets are placed within a trust and you effectively give up ownership of them. The trustees manage the assets and are no longer classed as being part of your estate.
This means that when you die, your life insurance policy will be handled separately to your other assets, and, therefore, will not be subject to inheritance tax. Remember, inheritance tax only applies if your estate is valued above the tax threshold.
Ensuring your life insurance policy is written into trust will also mean your family will not need to go through the probate process to access the insurance money.
Is your head in a spin when it comes to your finances? And not just when it comes to life ins! Are you currently in debt and worried about how to manage your repayments? For more information on managing your finances and to get free and impartial money advice, the Money Advice Service can be contacted in the following ways: Webchat: www.moneyhelper.org.uk Monday to Friday 8am to 6pm and Saturday 8am to 3pm. Telephone: 0800 138 7777 Monday to Friday 8am to 6pm.
Alternatively, Citizen’s Advice can be contacted on their Adviceline in England 0800 144 8848 Wales 0800 702 2020 9am to 5pm, Monday to Friday. There is also a web advisor available 9am to 5pm, Monday to Friday and an online debt advisor 8am to 7pm, Monday to Friday at www.citizensadvice.org.uk
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