Life insurance is a financial product that few of us like to think about. We would all like to believe that we are going to live forever, however there comes a point when reality needs to step in and plans are made for the inevitable.
Life insurance is intended to provide some level of protection for financially interested parties should the worst happen. This means that cover can be provided for others who will become financially disadvantaged by the death of the insured person. By taking out a life insurance policy, dependants will not have to deal with all the additional hardships which can be caused by the monetary loss of the insured’s income or productivity.
Life insurance is most frequently taken out to protect family members and replace the breadwinner’s salary ensuring that the family home will not be lost, however it can also be used to cover the costs of a paying for the tasks a house person performs on a daily basis, such as child care, housework, gardening, etc. Businesses also commonly take out life insurance policies on their most important employees to protect against any financial losses to the company that could be incurred due to their death.
For most people life insurance is used to protect their family by providing a lump sum to pay off any loans or mortgage repayments, so that the family home is protected, or to provide a replacement family income, but it is also often used to help cover funeral expenses, inheritance tax or provide an emergency fund to cover a period of financial instability following the insured’s death.
There are two broad types of life insurance: term insurance and investment type policies. Term policies are the simplest and generally the cheapest form of cover and will provide protection for a set period, after which the policy will lapse. Investment type policies such whole-of-life insurance, provide cover for as long as the policy holder lives, as well as building up an investment value which can be cashed in by surrendering the policy.
When considering what type of life insurance policy is most suitable, it is vital to decide what the purpose of the cover is to be, along with calculating how much cover is required. This is important when choosing the level of the cover needed.
The main cover types currently available are:
– Level term policies which will pay out a set tax free lump sum upon the policy holder’s death and premiums are set at the time the policy is taken out.
– Increasing term insurance is similar to a standard level term policy; however the value of the lump sum (and usually the premiums) increases with time to compensate for inflation or rising prices.
– Decreasing term is a type of life insurance where the lump sum value reduces over time. This form of cover is usually taken to protect loan or mortgage repayments, where the overall amount required to pay off the loan amount will decrease as regular repayments are made.
– Increasable term life insurance provides the option to increase the level of cover in the future, with the corresponding premium increases being based on the policy holder’s health at the time of initially taking out the policy without the need for a need medical or major re-evaluation. This type of policy can be useful to provide additional cover following marriage or the birth of a child.
– Renewable term insurance enables the term of a policy to be extended when the initial period comes to an end. The premiums to be paid are, like increasable terms, calculated based upon the policy holder’s health at the time of the policy being taken out.
– Pension-linked term policies such as B-Assured life insurance from Barclays allow the policy holder to claim tax relief on their premium payments, as long as they are eligible to contribute to a personal pension or stakeholder scheme.
For a life insurance guide and life insurance comparisons visit Moneynet or view the regular surveys in Which? and specialist personal finance magazines.
Disclaimer:
All information contained in this article, is for general information purposes only and should not be construed as advice under the Financial Services Act 1986.
You are strongly advised to take appropriate professional and legal advice before entering into any binding contracts.
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