Everything you ever asked about life insurance…and more

September 1st, 2022
Everything you ever asked about life insurance…and more

Here at Free Price Compare we provide clear and no nonsense financial information on the topics that really matter. Life insurance doesn’t need to be a daunting topic, so if you have questions on life insurance read on for our essential guide.

What is life insurance?

Life insurance is defined as "insurance that pays out a sum of money either on the death of the insured person or after a set period". It is a financial product that allows you to provide money for your family upon death. This money can be used to support them over a number of years which, for example, could be used to replace lost income or to pay off a mortgage or other debt.

You will pay an amount, called a premium, on a monthly basis to maintain your life insurance policy. There are a number of factors which determine how much you pay. This can include your age, health, lifestyle and the value of the cover you ultimately need.

Only one in three people in the UK has life insurance and over 25% of UK households with mortgages don’t have life insurance [1]. However, the UK life insurance market is still sizable. It is around 70% of the total insurance market and the total investment portfolio was nearly £1.7 trillion in the UK in 2019. A further statistic is very comforting, indicating that over 98.3% of life insurance claims in the UK are paid out.

There are three main types of life insurance that you need to know about:

Term assurance

Term assurance 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 is key!

Family income benefit policies

This type of life insurance is known as a decreasing term policy. The pay out received by your beneficiaries becomes 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 life policies

Whole of life policies 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.

Within whole life policies, there are two main types:

Balanced cover means the premiums will stay the same over the life of your policy, regardless as to how you 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 look low to start with, but remember they can increase and could even result in the policy becoming unaffordable altogether.

Why do I need life insurance?

If you have people who are financially dependent on you, a life insurance policy can protect them from being financially worse off after you die. As well as dealing with the grief of your passing, they may also be financially burdened which will add to their distress. Could your partner afford the mortgage on their own? Would childcare costs increase if there was only one parent around to look after your children?

What if I don’t have children or a partner? Life insurance will be less relevant if you do not have children or a partner with whom you share finances. However, there may be other people you may want to help after you die, such as a sibling or maybe a niece or nephew.

What information will I have to provide?

You will usually have to have the following details to hand in order to successfully complete an application for life insurance, but every provider will vary:

  • Your doctor’s name and practice address
  • Medical history
  • Information about any current or previous serious illnesses, suffered by either you and/or your immediate family
  • Information about any medication that you are currently taking or have been prescribed in the last 5 years
  • Your height and weight stats
  • Any existing life assurance policy information (such as the policy provider, policy number, policy term and the lump sum assured)
  • Your bank details (account number, sort code, name of bank and name of account) but remember that no money will be taken from your account until you give the go-ahead to start the policy.

What if I have health issues?

Millions of people have made insurance life choices and many of those people will likely have pre-existing medical conditions or immediate family members with health issues. Whilst this can be really concerning, the best thing to do in this situation is to thoroughly search the market for the best deal. There will almost certainly still be a policy available to you, but the greater the health issues usually means the policy premiums for life insurance are higher.

It’s very important not to lie on your application, as any false information could invalidate your policy. Be careful not to omit or obscure any information as insurance companies can use third party sources to verify your application details. The insurance company may be able to get information about you by accessing your medical records and medication history, for example. As part of the process, you also might be required to have a medical exam, including fitness checks and blood and urine tests.

Life insurance no medical questions

You may not want to share your medical history and that doesn’t necessarily mean you will be unable to get a life ins policy. No medical questions life insurance is indeed available. For example, there is a type of policy which guarantees acceptance to people aged 50-85, and often can be found by looking for a "guaranteed over 50 plan" or "over 50 life insurance". There is also a type of policy called a guaranteed issue which doesn’t require health questions or a medical exam.

How much does it cost?

Insurance for life cover can vary significantly depending on your age, how many people are covered by the policy, the health of the policyholder, to name but a few factors. The premium on your life insurance policy is determined by the risk classification, or risk class of the information you give as part of your application.

There are options at a range of premiums but beware of cheap deals that seem too good to the true, as we mentioned above, depending on the policy type, the amount you pay in future, as well as the amount paid out on death, can vary over time.

Consider using price comparison websites such as Free Price Compare to look at the best deals, or alternatively you could instruct a life insurance broker, which can be found on the British Insurance Brokers Association website. They will also be able to help with any life insurance question.

Can I have more than one life insurance policy

Having multiple life insurances and policies may seem unnecessary, but there are a number of scenarios where it actually could make sense for you. Imagine you have a single policy for yourself, then you get married and want to take out a joint policy with your spouse. It’s entirely possible (and common!) for people to have multiple policies as their situations change.

Life insurance and inheritance tax

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.

Alternatives to buying a life insurance policy

A valid life ins question is are there any alternative ways to financially provide for my loved ones in death? And the answer is yes, there are absolutely other things to consider that may suit your circumstances better.

The money saved on life insurance premiums could be spent paying down your mortgage, for example. There is also the option of using the money saved to buy shares or other investments.

Lastly, you may already have a policy without realising! Be sure the check if you have an aged policy you previously lost or forgot about. According to the BBC [2], there are approximately £20 billion of unclaimed assets in the UK!

Where to go for more money advice

Is your head in a spin when it comes to your finances? And not just in terms of questions for life insurance! 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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