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Life insurance is often one of the last things we think about when planning to provide for our families if the worst happens. This can be a huge financial mistake. Most people have family members that they would like to protect if they die suddenly. Providing for your loved ones when you have gone is one of the main purposes of Life Insurance.
What is Life Insurance?
Life insurance is an insurance policy designed to pay out a lump sum to your loved ones and provide them with a level of financial security should you, your partner or spouse die (if the policy is in joint names) during the period that you have insurance.
Life insurance is most often bought by people who have
- a Mortgage
- other large loans
- Children under the age of 18
- Family that depend on their salary
Life Insurance products have no cash value in themselves either during the term or at maturity and if you cease paying the premiums the cover will stop.
Having sufficient life insurance cover offers peace of mind knowing that your family will be looked after in the event of your death.
Why is Life Insurance so Important?
There are many reasons why this type of protection is important.
For example, life insurance is typically taken out when a mortgage is agreed, so that in the event of your (or your partner or spouse's death, if applicable) untimely death, the outstanding mortgage can be re–paid meaning at least your family won't need to worry about mortgage payments and keeping a roof over their head at such a distressing time.
There can be many other reasons why people may need to take out a life insurance policy, whether it is to pay for your family home or to leave those closest to you money for their futures.
Different Types of Cover
There is a variety of life insurance policies available and it is important to understand how the types differ when choosing the right policy for you. The most typical examples of life cover available are;
Level term insurance – which provides coverage at a fixed rate of payments for a limited period of time, usually 10, 15, 20 or 25 years (called the term). After that period expires coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments and/or conditions.
If you die during the term, the death benefit will be paid to the people you name on your policy.
For example: if you had £100,000 cover (also known as £100,000 sum assured) for 10 years the policy would pay out £100,000 if you passed away in year 1 or year 9
Term insurance is the least expensive way to purchase a substantial death benefit on a coverage amount per premium pound basis over a specific period of time.
If you have an Interest only mortgage, where the amount owed does not decrease, it is often this type of policy that is appropriate.
Decreasing Term Insurance – assurance can also be known as mortgage life assurance and so is often used in conjunction with a repayment mortgage, this policy is designed to pay out in the event of death during the term of your mortgage. The amount of cover will decrease in line with the amount owed on your mortgage. So for example if you borrowed £100,000 for 4 years repaid at £25,000 each year (assuming no interest is payable) then a decreasing life assurance policy set up to protect this would pay the following during the 4 years the policy is in force: £100,000 on death at the start of the policy, £75,000 on death at the end of year 1 of the policy, £50,000 on death at the end of year 2, £25,000 on death at the end of year 3 and reducing to zero when the policy finishes at the end of year 4.
This is the most efficient way to protect a repayment mortgage and the cheapest form of protection for it.
Terminal illness – benefit is usually added to a life assurance policy free of charge and should not be mistaken for critical illness cover. Terminal illness is paid upon diagnosis of a terminal illness, that is to say that you have being diagnosed with an illness that will end your life within 6–12 months from diagnosis.
Family Income benefit – is a term assurance policy (restricted to a specific term – a set amount of years) that protects a family's income and instead of paying a lump sum upon death, the policy will pay a monthly income for the remaining term of the policy. So for example, instead of covering yourself for £100,000 over 10 years as a lump sum (level term assurance), you would cover yourself for £10,000 per year over 10 years. This would pay out £100,000 (£10,000 per year for 10 years) if you died at the start of the plan, £50,000 if you died in year 5 (£10,000 for 5 years) and £10,000 if you died at the start of year 9 (£10,000 for 1 year). This policy is typically cheaper than a level term assurance policy but the benefit is reducing so that if you have a 10 year plan and die in year 10 the policy will only pay out for 12 months unlike a level term policy that will guarantee to pay the same amount no matter what point you die during the policy. This type of policy is typically used for family protection where affordability is an issue and a spouse or partner would struggle to survive if their partner's income was lost.
Use the form on the home page to compare life insurance quotes for family income benefit.
Critical Illness Cover – Critical illness insurance is designed to ease the financial pressures by paying a tax–free lump sum if you are diagnosed with a serious illness that is covered by the policy. The lump sum can give you the means to repay some or all of your mortgage if you are unable to work or help pay for home alterations, specialist equipment or provide an income. This cover can be taken on a level or decreasing basis, or as a ‘standalone' policy.
Each insurer and every policy is different and there can be exclusions and limitations, so it is very important to read and understand the terms and conditions of your chosen policy to double check the conditions you are covered against on the critical illness policy.
Whole of life – policies differ from term assurance cover (level term, decreasing term, family income benefit, critical illness cover) in as much as they are not restricted to a set amount of years protection as they last for the rest of your life. This policy will pay out when you die, unlike a term assurance policy that pays out if you die within the term, and so they are more expensive than term policies for the same level of protection. Whole of life policies are generally used to cover funeral arrangements, inheritance tax bills and to pass on an inheritance to family and should in many cases be considered in addition to a term policy. Whole of life policies do not typically include critical illness protection, although it is not impossible to get this.
Comparing Life Insurance
Before purchasing your life insurance it is important to consider how much cover you will need. The more cover you need the greater the monthly premiums will generally be. Level term is slightly more expensive than decreasing and the premiums are affected by several different factors. Typically these are
Your age – In most cases, the younger you are when you start the policy, the cheaper the premiums will be.
Your health – If you have previously had a serious illness or medical condition, it is likely that your premiums will be increased.
Smoking any types of tobacco products will increase the premium. These can reduce after you have stopped smoking for at least 12 months.
The amount of cover – The greater the amount of cover required, the more the premiums will be.
Having said all of the above, life insurance can be relatively inexpensive but it is always important to calculate how much cover you need before buying a policy. You should take into account all your financial commitments and future expenditures such as children's education or funeral costs/expenses. Take a look at our easy Life Insurance Calculator to work out how much cover you might need. Unlike other types of insurance, you can buy as much life insurance as you feel that you need or can afford.
Important things to remember: As for any life insurance this type of policy will be underwritten which means that you may not be eligible if you already have serious health problems. This may also affect the level of premium. There may also be exclusions if you do activities such as risky sports. You should look at the product details for each provider.
It is important to make sure you get the best deal possible on your life insurance and that's where we come in. Our partners compare a wide range of life insurance companies to bring you competitive quotes available that meet your individual circumstance and needs.
Use the form on the home page to compare level term life insurance quotes
Guaranteed rates are most common with level term life assurance policies. This allows you to budget over the remaining years of the policy as the payments will stay the same throughout.
Use the form on the home page to compare life insurance quotes with guaranteed rates!
Reviewable rates are most common with critical illness policies. The premiums are reviewed at intervals throughout the term of the policy (usually every 5 years) and the premiums change accordingly to reflect the risk. Reviewable rates typically start off cheaper than guaranteed rates, however it is worth pointing out if you select this option you do not have any control over the price after review and you may find that the premiums go up.
You have the option to index link your policy which helps you keep the policy in line with inflation. When you select this option you will typically be able to increase the value of your cover in line with the retail price index (RPI) every year. Your premiums will also increase too and usually go up by RPI plus an additional percentage charge (typically 2–2.5%). How much your premium will change will vary from provider to provider so please look for this this information in the Key Facts document that supports your quote.
Use the form on the home page to compare life insurance quotes with index linking!
Waiver of premium
Waiver of premium allows you to cover the cost of the premium if you are incapacitated due to illness or injury and are too ill to undertake your normal occupation. The cost of the premium is covered so that you can continue to benefit from your protection policy without worrying about the cost until you return to work. Providers usually have their own specific terms and conditions so if you need this cover make sure that you are aware of how your policy protects you. You can find this information i
Payments of life policies are typically taken monthly by Direct Debit however you may be able to arrange to pay annually should you so wish. You will need to keep up the payments on a life assurance policy to insure that you are covered. Failure to do so will result in the loss of benefits under the plan and lead to cancellation of your policy. You will typically be allowed a period of grace (this differs from provider to provider) to catch up with any missed payments but after this period has expired the policy will be cancelled.
Who will my policy pay when there is a claim
Another point to consider is do you want the policy written in trust? The answer can vary depending on what policy you have and if you have a Will. The following should be used as a rough guide:
- If you have a joint life policy and one of you passes away the policy will usually be paid to the surviving partner.
- If you have a critical illness policy the benefits will usually be paid to yourself.
- If you are diagnosed with a terminal illness the benefit is usually paid to yourself before you pass away.
- If you have a single life policy and you pass away the proceeds of the policy will form part of your estate. If you die intestate (no will) the policy will follow the rules of intestacy and usually be distributed to ever widening circles of your close family. If you have a will the policy benefit will be paid to the beneficiaries listed in the will.
Another way to ensure that the funds of a life policy reach the right people is to write the policy into trust. This effectively gifts the proceeds of the policy to a third party, typically an individual or group of individuals. You can gift all the benefits of your policy, for example the death benefit and critical illness benefit, or you can split the trust so that you retain some of the benefits yourself (for example a critical illness payment). A split trust is required to retain the critical illness benefit for yourself whilst gifting the death benefit to someone else. Along with ensuring the proceeds of your plan are paid to the right people there are two other main advantages to writing a policy into trust: 1 – the benefit is paid immediately (avoiding any lengthy probate delays) and 2 – the benefits are paid free from inheritance tax.
The two main types of trust are the Bare Trust (cannot be changed) and the Flexible Trust (can be changed once written).
Swapping life insurance policies
There are no cancellation fees for stopping an existing policy and starting a new one and you are free to change any time. Fixmylifeinsurance.co.uk not only helps people make the right choices when taking out new policies, it helps people save money every day, including people with existing policies looking for a better deal. Start comparing now to ensure that you are on the best rates.
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*£75,000 of level term assurance over 15 years, for a 30 year old non smoker, £6 per month with Legal & General. Subject to underwriting, accurate as of March 2015.
fixmylifeinsurance.co.uk is a website dedicated to finding the best value life cover quotes we can for our users. We work with selected life insurance brokers to deliver competitive life quotes from a panel of leading life insurance companies. Completing our short form could allow you to get and compare quotes for life insurance, mortgage life insurance, family income benefit, critical illness Cover and whole of life protection policies.
Fix My Life is a trading style of The Affiliate People, a company registered in England and Wales, registered number 06903071 and registered office address Suite 408-9, Britannia House, 1-11 Glenthorne Road, London. W6 0LH. For further details click here . The Company is duly registered with: The Data Protection Act, 1998 Reg. No: Z259836X; The Affiliate People Ltd (Financial Conduct Authority register number 724835) is an appointed representative of Ingard Financial Limited which is authorised and regulated by The Financial Conduct Authority under Register number 450731.
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