- DO YOU NEED IT?
- TYPES OF LIFE INSURANCE
- TIPS FOR BUYING LIFE INSURANCE
- TIPS FOR CHOOSING A LIFE INSURANCE COMPANY
- APPLYING FOR LIFE INSURANCE
Life insurance can provide peace of mind that your dependants will be financially secure should the worst happen.
1. DO YOU NEED IT?
Life insurance is designed to provide financial support for surviving dependants on the death of the policyholder. If you don't currently have any dependants who would be financial disadvantaged by your death then life insurance may not be a priority for you.
If you have a partner, a family or business partners who would suffer financially if you were to die, then life insurance should be considered to provide funds to clear any debts and/or provide a financial saftey net on your death.
2. TYPES OF LIFE INSURANCE
There are two basic types of plan to choose from:
Term Life Insurance
This is the cheapest option, and pays out only if the holder dies while the policy’s fixed-length term is in force. If the holder survives until the end of the term, they get nothing back. People often time their insurance to run only until a big family commitment – such as the children’s education, had been cleared.
Whole of Life Insurance
As the name suggests, these policies remain in force right through the buyers life. It follows that the insurance company will have to pay out in almost every case, and premiums are therefore higher than those charged on term life insurance plans. Some policies demand that premiums be paid all the way up to the holders death. Others become paid-up at a certain age, and waive premiums from that point onwards.
What Does The Cover Provide?
There are a number of different types of Term and Whole of Life Insurance plans on the market. The cover which is provided will depend on the type of plan taken out. The types of plans available are as follows:
Term Life Insurance
- Level Term: The plans potential pay out remains the same for the full term of the policy.
- Decreasing Term: The level of cover gradually reduces over the policy term to match a reducing liability such as the amount left to repay on a mortgage loan.
- Increasing Term: Cover offered and premiums paid gradually increase in line with inflation. Designed to ensure the amount of cover purchased remains realistic and is not eroded by the effects of inflation over time.
- Renewable Term: Allows plan holders to extend their cover for a further term with no health check.
- Convertible Term: Allows holders to swap their term cover for a whole of life or endowment policy with no health check.
- Family Income Benefit: Pays the surviving family a regular income instead of a lump sum for the remaining term of the policy.
Whole of Life Insurance
The majority of whole of life insurance policies are unit linked which means that premiums are invested into a fund and the cost of the protection is deducted from the fund as it grows. When a plan is taken out there is a choice of ‘Maximum’ or ‘Standard’ basis.
Maximum basis gives a very high level of cover for the monthly premium. Whilst this level of cover will be guaranteed for 10 years it is very likely that there will have to be an increase in premiums after each of the regular reviews. These usually take place after 10 years then after every 5 years.
Standard basis gives a lower level of cover for the premium, but is more likely that this level of cover and premium will stay the same throughout the policyholders life.
3. TIPS FOR BUYING LIFE INSURANCE
Don’t head straight for the nearest high street bank or direct provider just because they are familiar. Some banks and high street providers are tied to one insurer and won’t be able to offer potentially cheaper and better quality cover from other providers.
Use an independent insurance specialist who can compare policies and premiums. Some offer discounted premiums and free advice to help you choose the right policy and provider for your circumstances.
Visit our Life Insurance companies category for a comprehensive listing of UK life insurance companies and brokers.
Comparing the Cost
The UK life insurance business is highly competitive, but the industry tries to avoid price competition whenever possible. Instead, life insurance companies attempt to make their products sufficiently different from their competitors so that price is less of a factor in product selection.
However, there are ways you can keep your premium rates to a minimum without affecting the quality of your cover.
Obviously, the cost of monthly premiums is going to be a major factor in your choice of insurer but, it should not be your only consideration.
- Consider Term Life Insurance - Term Life Insurance is the cheapest form of life cover available and premiums are very competitive.
- Shop around - in particular, if you know exactly what type of cover you require and don’t need advice, you can reduce your premiums by applying through a discount life insurance broker. They discount the insurance companies standard premiums by rebating the majority of the commission paid to them as an agent for the company. This reduces your monthly payments below the premium you would pay by applying direct to the insurance company.
- Stop smoking - premium rates for smokers are 30-40% higher than for non-smokers. If you can or are thinking of quitting you will save hundreds on your premiums over the term of the policy.
- Only pay for the cover you need - If you are looking for term insurance and critical illness, you can make big savings by buying a combined policy. These only pay out one lump sum rather than the two that separate policies would pay, if you suffer a critical illness and then die.
Know What You Need
There are many different types of life insurance and policy options that are designed for various needs. To ensure you aren’t disadvantaged or paying too much for cover you don’t need, either research the options or take independent advice.
Work Out How Much You Need
Generally speaking, your life insurance should provide a lump sum big enough to pay off your mortgage and other debts, or to invest to provide an income to support your dependants for a sufficient time such as six months or a year.
There can be major differences between UK life insurance policies so it is important that you compare like with like and check the small print. This is particularly important if you are including extra’s such as Critical Illness Cover. Always read the policy documentation carefully and look for some of the following benefits:
- Are the premiums Guaranteed? This means the premiums are guaranteed to remain the same throughout the term of your policy. This is opposed to `Reviewable´ premiums which, as the name suggests, are reviewed usually every 5 years and can increase dramatically at the discretion of the insurance company.
- Check that the policy has terminal illness benefit included (not to be confused with Critical Illness Insurance). This is a valuable extra which is now included in most Term Life Insurance policies as standard and will pay the life insurance amount early if you suffer a terminal illness.
- How flexible is the policy? It's important to review your life cover regularly and following any change in your circumstances, so it's useful to be able to alter your cover to suit your changing needs.
- Can the policy be written in trust? This will avoid any delay in the money going to your dependants and the risk of inheritance tax being charged on the benefit.
- Can waiver of premium benefit be included in your plan. This is a valuable extra which, if you become too ill to work for a number of months, will ensure your cover continues without you having to pay the premiums.
- A valuable feature of some policies is counselling for your family if you die?
Write Your Policy in Trust
Even an average life insurance pay out can easily take the value of your estate on your death over the inheritance tax allowance. Anything over this threshold is liable for 40% tax when this can easily be avoided by putting the policy in trust. Its free and simply requires completion of a trust form available from the insurance company. Once in trust, the policy remains outside your estate so won’t increase its value on your death.
If Unsure Take Advice
Life insurance can be as simple as insuring your car if you know what you need and your affairs are simple. However, if you’re unsure or your affairs are a little more complex you should take independent advice.
4. TIPS FOR CHOOSING A LIFE INSURANCE COMPANY
Whilst price is obviously going to influence your final decision, you should make sure that your chosen insurer pays just as much attention to the quality of their claims procedure as their sales process.
No matter how good the policy, it will all be for nothing if your insurer is difficult or obstructive if you should have to make a claim.
Before taking out a policy it is advisable to contact your prospective insurer and ask about their claims history. Note their willingness to provide this information and the attitude promoted by their response. Do they look for reasons to pay claims or excuses to avoid them?
When selecting or evaluating a UK life insurance company, a logical place to begin is by reviewing the ratings given by major insurance company rating services such as Standard & Poors and AM Best. In a rating, the rating company or agency expresses its opinion of the life insurance companies financial condition.
5. APPLYING FOR LIFE INSURANCE
Like any other type of insurance, life cover is about protecting a risk. The level of risk you pose to an insurance company determines the level of premium you will have to pay to them for taking that risk on.
For life insurance, the risk purely relates to your chances of dying (or becoming ill if you choose to add this option) during the term of the policy. To assess your risk of dying or becoming seriously ill, the insurance company will require you to complete a thorough application form collecting basic personal details and more indepth information about your health and family history.
When applying, be sure to answer all questions fully and honestly. Declare everything that you are aware of and if in doubt, declare it anyway. Failure to declare even a minor issue can result in a claim being declined. Do not give the insurance company any excuse to refuse your claim.
The Underwriting Process
On receipt of your completed application form, the insurance company will check your responses and decide if any further personal or medical information is required to begin the underwriting process.
If further medical information is needed, the insurance company will either send a simple questionnaire directly to you, a questionnaire to your GP or request a full medical examination. All further medical investigations will be paid for by the insurance company.
Once the underwriters are in possession of all the facts required, your application is assessed for risk, a premium calculated and final terms confirmed in writing to you on a 'standard', 'rated' or 'declined' basis. If 'standard' your premium should equal your original quote and if 'rated' your premium will be increased to pay for the extra risk assessed during the underwriting process.
If your application is declined for non-medical reasons, they will be confirmed in writing to you. If you are declined for medical reasons, the insurance company will confirm the precise medical grounds in writing to your GP for him/her to explain this to you in person.
If your application is accepted, congratulations and well done. You've taken a step towards financial security and can now start enjoying the peace of mind of knowing your finances are protected against the worst.
Visit the Life Insurance Companies Directory for more tips and information.
PLEASE NOTE: The guidance published in this article is for information only and does not constitute financial advice or a recommendation of any particular life insurance policy or provider. If you are in any doubt please consult an independent insurance adviser. A database of advisers in your area is available at www.unbiased.co.uk
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