Guide to Life Insurance

Have you ever wondered what would happen to your family if you passed away? Would they be able to maintain their lifestyle without your contribution to the household? Would life be made extremely difficult by your passing?

The great news is there are a range of protection policies that insurers provide to cover a whole host of outcomes including passing away, being diagnosed with a serious illness or being unable to work for a period of time. In this guide we focus on life insurance but be sure to subscribe to our newsletter and check back on the blog for other in depth protection articles.

For now, let’s discover more and start by answering “what is a life insurance policy?”

What is a Life Insurance Policy

In simplest terms, a life insurance policy covers you for a predetermined period of time. If you pass away within the timeframe, your next of kin can make a claim and receive a payment.

There are three main types of life insurance in the UK:

• level term assurance policies
• decreasing term assurance policies
• whole of life insurance policies.

If you are over 50, you will also have access to an Over-50s insurance policy which is designed to make a lumpsum payment, typically to cover funeral costs.

Level Term Assurance Policies

A level term assurance policy is a life insurance policy where the payout remains level for the entirety of the policy term.

You have the flexibility to choose how long you wish to be insured for and the amount of cover your next of kin will need if you pass away.

The payout on the policy will be the same in year one, and year twenty.

You can also index link these policies, so your insurance payout rises to prevent inflation diminishing the value of the policy.

Level term assurance policies are the most popular general life insurance policy as they are affordable and provide suitable cover throughout the life of the policy.

Whole of Life Policies

The downside to a term assurance policy is once the policy ends you will no longer be insured. For some, this is unsuitable as they wish their next of kin to receive a payout whenever they pass away.

A whole of life policy does exactly that, covers you for the entirety of your lifetime providing you make your monthly payments.

Whole of life policies are more expensive than a comparable level term assurance policy because the insurer knows they will be making a payout if you maintain your premiums.

A fantastic aspect about whole of life policies is you never pay in more than you receive, however if you live for a very long time, the amount of premiums you pay could close the gap to your payout significantly.

What is a Decreasing Life Insurance Policy

We’re often asked “what is a decreasing life insurance policy” by people who’ve begun to do their own research. So, let us explain. When you purchase a property in the UK with a mortgage, you are taking on a substantial financial liability that remains for your next of kin if you pass away.

A decreasing term assurance policy tracks your mortgage, and the payout decreases over time in line with the amount outstanding on your mortgage.

Decreasing term assurance policies are typically the cheapest life insurance policies as the payout decreases which represents less risk to an insurer. It is important to review a decreasing term assurance policy every time you remortgage to ensure it is still covering the mortgage liability correctly.

Over-50s Life Insurance

If you over 50 you automatically qualify for an Over-50s life insurance policy.

These polies offer much less in terms of payout with sums paid typically ranging from £5000 to £15,000.

Your age at the time of application and how much you wish to pay monthly will be the deciding factor for your lumpsum – however if the payout is too high for your needs you can opt for a lower monthly premium and a smaller lumpsum.

There are no medical screenings involved with an Over-50s policy making them excellent if you have had serious medical conditions in your lifetime and still want a basic level of cover.

Unfortunately, with Over-50s policies, you may end up paying in more than you are insured for if you live for a long time after taking the policy.

Placing a Life Insurance Policy Into Trust

When you take a life insurance policy you will be asked who you want the money to go to in the event you pass away.

This person will become your nominated beneficiary.

You can opt to put the life insurance policy into trust which means the provider pays out the money directly to your nominated beneficiary by depositing the sum into the trust.

If you want to put your life insurance policy into trust, it is straightforward and free. You will be provided a form to complete which you submit back to your insurer. You can do this at any time you hold the policy, but it is commonly completed at the outset.

Placing a life insurance policy into trust prevents any taxation on the payout that might occur if it was paid into your estate.

Alternatives to Trusts

Trusts are optional and although recommended, you should not feel like they are mandatory. You may not know who you want the money to go to or you may want the money to go into your estate to cover liabilities.

You may be in the position that your life insurance payout does not take you over the Inheritance Tax Threshold and decide a trust is unnecessary.

If a policy is not in trust, your payout will follow the rules of probate. Sometimes it will go directly to your spouse, or where you only have children or extended family left, it will be paid into your estate to be divested in line with intestacy.

What Happens when the Beneficiary of a Life Insurance Policy Dies Before the Insured

If your policy is in trust and your nominated beneficiary pre-deceases you, then you will need to contact your life insurance provider and arrange for the old trust to be removed and set up a new trust.

Failing to do so can cause complications with your life insurance payout. Reputable brokers will always review your protection policies periodically to ensure they remain suitable and in line with your needs so you should be prompted over time to change beneficiaries if necessary.

What Does a Life Insurance Policy Cover?

Life insurance covers you for the event of your passing.

There is no prescribed manner of death on a life insurance policy and as mentioned, life insurance providers cover suicide.

Some manners of death will result in a slightly longer pay out timeframe, for example dying under unusual or suspicious circumstances.

Overall, the vast majority of life insurance claims are straightforward and processed quickly once you provide the death certificate to the life insurer. For more details you can contact a broker to find out what does a life insurance policy cover from specific insurance providers.

Will My Death in Service Benefit Be Affected?

If you work in the public sector such as for the NHS or you happen to be an employee of a company that offers a death in service benefit, you may be wondering if life cover impacts that in any way.

In terms of payouts, absolutely not, your next of kin will be entitled to your life insurance payout and any death in service benefit you hold.

However, when taking a life insurance policy, it is best to discuss death in service benefits with your broker as you may wish to reduce the amount you are covered for on your life insurance.

After all, both death in service benefits and life insurance policies are designed to give your next of kin a desired amount when you pass away. You might only need a small top-up as a life insurance policy to cover the shortfall between your death in service benefit and your desired pay out.

Can I Take Multiple Life Insurance Policies or Double Insure?

As discussed, protection insurance works in a very different way to general insurance products and you can take multiple life insurance policies if you wish to.

When your policy payouts exceed a threshold though, life insurers may request further information when you apply for a policy.

This extra information is not to prevent you from taking out more life insurance, it is designed to allow the provider to understand why you need such a high amount.

This is known as financial underwriting and is particularly common for high net worth individuals or company owners.

Discuss Life Insurance with an Expert Broker

Life insurance is a truly fantastic product that unfortunately many people overlook. Discussion around death in our society is particularly taboo and sometimes people find it morbid to insure their own life.

The truth is, your next of kin may struggle tremendously without your income or even your presence, life insurance represents peace of mind. Should the unthinkable happen, your loved ones are financially looked after.

Discussing your personal situation and finances with an expert broker will help you identify where your shortfalls are. If you are young and healthy, life insurance may not be the best protection policy for you and income protection may be more important.

An expert broker like Boon Brokers will help you understand what needs to be covered and will source the best insurance for your situation. They’ll also be able to answer your questions like “what happens when the owner of a life insurance policy dies before the insured?”

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Broker. Boon Brokers has a full panel of protection insurers and products and provides fee FREE advice.

Contact Boon Brokers to discuss or review your life insurance policies today.