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Life insurance buyers guide

life guideWhen you take out a life insurance policy, you’re relying on the cover to offer rock-solid financial protection to your family if the worst happens. So it makes sense to do your homework before you sign up to make sure you’re getting the most appropriate and best-value deal.

There’s no point in paying for insurance which, when it comes to the crunch, turns out not to provide the assistance your family needs and expects.

In this guide, we explain your options when it comes to choosing a policy; we analyse that factors that affect the size of your premiums; and we show you how to find a cheap life insurance policy that suits your needs.

What is your life insurance for?

Before you sign up for a policy, you need to work out exactly what kind of protection or cover you want it to offer. For example, you may have decided to take out life insurance because you have just bought a home: the cover would ensure that your partner would be able to pay off the mortgage in the event of your death, and would not therefore face repossession or eviction.

If you have children, you may want a policy to provide for them while they are growing up if they could no longer rely on your income.

Or you could want to set up a policy that would guarantee your surviving relatives an inheritance when you died. Whatever your specific requirement is — of course, it could be a combination of these things — will affect how you set up your policy, as we explain below.

How much life cover should you take out?

The more protection your life insurance policy offers, the higher your premiums will be. But there is a great deal of competition among insurers these days, and by comparing the best offers using a price-comparison service you should be able to find the cover you need at an affordable price. If your policy is designed to cover only your mortgage, choosing the sum insured should be straightforward.

If you want the policy to provide your dependants with a regular income for a number of years, you should look at your current expenditure and think about possible future costs (for example school or college fees) to work out a satisfactory figure. If your main concern is to provide an inheritance, the sum insured may depend more on what you can afford to pay in premiums.

If you can’t afford the premiums necessary to cover your entire mortgage, or provide the kind of income your family would need, there is nothing to stop you taking out a lower level of protection today with a view to extending the cover at some point in the future.

How long should the cover last?

When you buy life cover, it can last either for a fixed period or for the whole of the rest of your life. Insurance that applies for a limited time is known as term insurance or term assurance.
If you only want cover for your mortgage — which will typically last 25 years — or to give your family a financial safety net while your children are growing up, then term insurance is more appropriate.

If, on the other hand, you want the policy to provide an inheritance, whole-of-life insurance, as it is known, is a better bet. With term insurance you would run the risk of dying after the term has expired (in which case your surviving relatives would get no payout).

What form should the payout take?

When you choose your policy’s benefit, you can decide to have a lump sum payment, a regular income, or a mixture of the two. A policy designed to pay off a mortgage would need to provide a lump sum, as would insurance that was set up to provide an inheritance. If you wanted to replace your salary to help your family deal with ongoing living expenses, a regular income could be more apt.

Should the level of insurance change over time?

The amount you are insured for could change year after year. If you are covering your mortgage, the amount you owe your lender will fall as you make monthly repayments (provided it is a repayment mortgage rather than an interest-only loan). So it could make sense for the scale of your life cover to reduce in line with the loan — this is known as decreasing term insurance, and premiums will be lower than for cover which remains the same (level term insurance).

On the other hand, you may want potential payouts to increase year on year to cope with inflation — this is known as increasing term insurance, which will be more expensive, other things being equal.

Should you cover your partner?

Frequently it is the main breadwinner in a family who takes out life insurance. But you should consider extending the cover to your wife or husband. After all, if the partner who was responsible for childcare or other work at home died, there would be financial implications. The main earner may need to give up work to some extent, or to find extra money to pay for help at home.

If both partners want cover, there is the option of buying joint life insurance or two separate policies. Joint cover only pays out on the first death, after which the policy ends. Separate policies would pay out when either partner died, thus offering a higher level of protection. This option may be more expensive, but it is well worth comparing prices to see whether any extra costs are worth bearing given the greater scope of the cover.

What other factors affect the cost of life insurance?

As well as the scope of cover and how long it lasts, there are a number of issues that dictate the size of your premiums, including:

Your age: The younger you are, the further away a potential life-insurance payout is (and if you have term insurance, the less likely you are to die within the term). From your insurer’s point of view, this means you’re likely to pay more in premiums before your family makes a claim — so your monthly costs should be lower.

Your health: If you suffer from medical problems or have a family history of health issues such as heart disease, you can expect to face higher premiums.

Your lifestyle: Smokers and those who are seriously overweight may also face higher insurance costs. But if your lifestyle improves over the course of the policy — for example if you give up smoking — tell your insurer and you may be able to negotiate cheaper premiums.

Your gender?:  Actually, this shouldn't make a difference. Since December 2012, an EU ruling dictates that insurers are no longer able to charge men and women different prices based purely on their sex. Previously, men paid more for life insurance because they tend to die younger.

How you can get the cheapest policy

With a huge array of companies offering cheap life insurance, it makes sense to go online and compare prices from as many providers as possible. Use the information above to tailor your policy as accurately as possible to your and your family’s requirements. Remember, you can use a comparison site to check prices for different lengths and levels of cover to give yourself a better idea of how you could save money.

Saving tax and hassle

One final tip for setting up a life insurance policy is to consider writing it in trust: this means your family may be able to 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. This means that payments from the policy are 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.

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