A lost income due to death can be a very large expense for families. It is important to plan ahead if possible to minimise the impact of this financial burden with the use of life insurance.
Below are a few options that may be available however it is recommended that you seek advice from an Independent Financial Adviser if advice is needed.
Life Insurance
What it is
Life insurance provides financial security for the people who are dependent on you financially. Life insurance will pay out a lump sum or fixed regular income either whenever you die, if a whole of life assurance contract, or if you die during a specified term with a term insurance policy.
Free life insurance cover
A promotion for free life cover is currently available on the 'free life' tab.
Different types of cover
Term insurance
Sometimes called term assurance, this is the simplest and cheapest type of life insurance. It only pays out if you die within the term of the policy. If you are still alive at the end of the term you receive no payout. The premiums you pay are usually fixed for the term although some policies have reviewable premiums after a certain period of time.
There are many different types of policy and options you can have within your policy.
Decreasing term insurance is often linked to a repayment mortgage (where the amount you owe decreases over time) and may, in this instance, be called mortgage term insurance or mortgage protection life insurance.
Inflation protection, if you do not arrange for your cover to rise in line with inflation, the cover will lose its buying power in real terms over time. Many term assurance and family income benefit policies include the option for your cover to increase automatically in line with inflation each year, however, this may result in higher premiums.
Waiver of premium, this optional extra ensures that your premiums continue to be paid if you are unable to work due to long term sickness or disability.
Conversion options, a small number of policies allow you to convert your policy into a different type of life policy (whole of life, for example) without the need for you to provide fresh evidence of your state of health.
Guaranteed insurability options, marriage, birth of a child, divorce and moving home may increase your financial liabilities, in which event you can take out a top-up policy. Policies that include 'guaranteed insurability options' allow you to increase cover within a set period following major life events without fresh medical evidence. Otherwise, if your health deteriorates, cover may be more expensive or difficult to buy.
Renewal options, some term assurance policies can be arranged on a renewable basis, which means that at the end of the policy term – typically five or ten years – you have the right to take out a further policy for the same term as the original policy, without the need to provide further information about your health. Buying a renewable policy is cheaper at the outset than a normal term assurance policy because the period of insurance is shorter, making these policies attractive to people on a limited budget when they are young. However, you should bear in mind that the cost of the ‘renewed’ cover will be based on your age when you renew, so the long term cost will be higher than a standard term assurance policy bought at the outset.
Family income benefit, this pays out an income, normally monthly, rather than a lump sum.
Critical illness cover, some life assurance policies allow you to buy critical illness cover as a 'bolt on,' for an added premium. Critical illness cover pays a lump sum if you are diagnosed with one of a number of pre-defined life threatening illnesses or conditions, such as certain cancers, a heart attack or stroke and survive a certain amount of time thereafter (typically 30 days). Critical illness is a complex product and policies vary considerably, so it may be advisable to take independent financial advice.
Gifts inter vivos policies
These policies are designed to cover the potential inheritance tax liability that can arise if you bequeath assets or gifts to someone from your estate while you are alive.
Such a gift is called a potentially exempt transfer (PET) because the liability for inheritance tax (IHT) tapers off over seven years. A gift inter vivos policy last for seven years and is specifically designed to cover the tapering liability should you die during this period.
Pension term assurance
Stand-alone Pension Term Assurance (PTA) is term insurance which uses the rules for pension schemes to provide life cover. Despite the name, this does not have to form part of your pension. It pays out on your death rather than giving you an income in retirement. PTA won't necessarily be called pension term assurance; firms can use their own marketing names for it, so make sure you read the policy documents and understand what you're buying.
Changes to the tax rules in 2007 means that stand-alone PTA no longer has a tax advantage over ordinary term insurance products. However, if you already have a PTA policy that gets tax relief you will not be affected. If you are considering PTA, you should also look at ordinary term insurance and decide which product best meets your needs.
If you have an existing policy where you can increase your cover by paying higher premiums, you will still get tax relief on those increased premiums. However, if your policy doesn't include this option, you won't be able to increase cover and get tax relief on higher premiums.
Whole of life
Whole-of-life insurance pays out an agreed sum when you die, whenever that is, as long as you are still paying the premiums
How much cover
As a rule of thumb, financial advisers recommend that you insure a sum equal to 10 times your annual salary. In the event of death this lump sum can be used to pay off debts or can be invested to provide an income. While this might not be realistic if you are on a tight budget, where you have some insurance already, you will only need to top-up your existing cover.
Having a baby
Your life will change in so many ways when you start a family as, along with the joy of discovering you are going to have a baby, comes a time to take stock of your financial situation.
Children may be priceless but they come with a hefty price tag as raising a child from birth to the age of 21 can come to a hair-raising £193,772; with the first year alone costing £8,853*.
* The points above are not recommendations but purely for information. It should not be assumed to be correct and it is recommended that you seek advice from an IFA to confirm the information's validity.
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