If you have life insurance, it is a good idea to regularly review the cover to make sure it’s right for you and your family circumstances.
When you sign up for a policy, the extent of cover – how long it lasts, and how much it would pay out – is based on your financial situation and commitments at that time.
But these can change. Your life insurance policy needs to change as well to ensure your family is fully protected if the worst happens to you or your partner.
Many people take out life insurance out to cover a mortgage, and it is likely this commitment will increase at some point.
For example, if you have moved to a bigger property, the amount you owe your bank or building society could have gone up. The same may apply if you have remortgaged to release equity from your current home.
Alternatively you may have extended your mortgage term when you moved, or in order to reduce the size of your monthly repayments.
If you original life policy was only designed to run for 25 years (in line with the original mortgage term) it could end before your home loan is paid off.
Perhaps the other most common reason to review life cover is changes to the size of your family. If your original life insurance policy was taken out when you and a partner bought your first home, for example, it may need to be amended when you have your first child – and subsequently for any further children.
Insurance to cover the mortgage may be sufficient when you do not have children, but as your family grows you may also like the policy to provide an annual income (as well as a lump sum to clear the mortgage) in the event of your or your partner’s death. Read the small print of any documents for a full list of coverage.
How to change your policy
If you review your cover and find it lacking, you can either ask your current insurer to increase the scope of your protection, or cancel your policy and shop around for another.
You may equally choose to reduce the amount of cover – for example if you’ve been able to pay off your mortgage faster than you expected.
Not all policies can be amended to provide more or less cover: you need to check this with your insurer.
Those that do allow such changes may let you increase the amount you are protected after certain life events, such as moving home or having a child. Your premiums will increase, but you may not have to face any new checks on your health or occupation (which could lead to a sharper rise in premiums).
If your insurer does not allow changes in cover, you will need to seek a new provider. But bear in mind, it could be more cost effective to maintain your old policy and take out “top-up” insurance with the new company.
Life insurance premiums are generally lower the younger you are when you sign up for a policy: this means your existing cover may be priced at a much better rate than any new policy you can find, and is therefore worth hanging on to.
The difference could be even greater if you have suffered any health problems since the original policy was set up.
You may need to tell your new insurer that you are buying cover from it as a top-up to an existing policy: the firm should ask you about this in the application process.
Also note that new legislation means that insurers are unable to price premiums separate for men and women.
Changing who benefits from your policy
When you set up a life insurance policy, any payout from it goes into your estate when you die, along with other assets such as your home and investments.
Your estate is then distributed among your heirs in accordance with any will you have drawn up.
If you don’t have a will, intestacy laws are used to decide who gets your estate. This will often be your spouse or civil partner, but this is not guaranteed and it is therefore recommended that you set up, and regularly review, a will to avoid any doubt.
But it is also possible – and often advisable – to set your life policy up in a trust. This means your dependants can get hold of any payout with the least hassle and the lowest possible tax charge if the worst does happen.
Writing your life insurance policy in trust means the cover is ring-fenced outside the rest of your assets, such as savings, investments and property.
Consequently, any payment from the policy is not included in your estate for inheritance tax purposes.
At the moment, inheritance tax is charged at 40 per cent on any bequeathed assets above the £325,000 threshold.
So depending on the value of any property or investments you have, up to 40 per cent of a life insurance payment could end up in the taxman’s hands if the policy is not written in trust.
And because the life policy is not included in your estate, the payout does not have to go through the probate process with the rest of your assets, which means your family will probably get the money much more quickly.
A trust is normally simple and cheap (or even free) to set up: talk to your insurer when you take out your policy, but bear in mind that a trust is not appropriate in all circumstances.
When you set up a trust, you name a trustee – who is responsible for overseeing the trust in the event of your death – and its beneficiaries. This could be your partner or your children; in the latter case you can stipulate that they do not receive any money until they turn 18 or 21, for example.
Whenever you review your life insurance, you should also review your beneficiaries and trustees: these may change if you get divorced, for example.
Find out more about life insurance