At ADN Financial Services, our advisers get asked a range of questions relating to life insurance (also known as life assurance or life cover). This guide seeks to provide understanding for the most common queries you have about this important type of cover

1) What is life insurance for?

The purpose of life insurance it to provide financial support for your partner, children or anyone else that depends on your income, in the event of your death. It’s not scenario that most of us want to think about, but should anything happen to you, life insurance can be an invaluable safety net for your family and give you with the reassurance that they’ll be provided for.

Life insurance can be used to cover your dependents’ everyday expenses or specifically to cover the cost of a mortgage, reducing their financial burden. It can also be used as a method of reducing inheritance tax. The amount paid out will depend on the level of cover. Life insurance can be paid out either as a lump sum or as regular smaller payments.

2) Are there different types of life insurance?

Yes, the two key types of life insurance can be defined as either a term policy or whole-of-life policy.

Term Life Insurance Policy

A term policy runs for a fixed period of time such as 10, 20 or 30 years and the insurer only pays out if you die within that term. There are also two main types of term policies – level term and decreasing term.

Level term policies pay out the same amount regardless of when you die within the duration of that term. So, if the agreed payout is £250,000 and the policy is for a 30 year term, whether you die in year 1 or year 29 of the term, your dependents will still receive the full; £250,000.

With a decreasing term policy (also known as mortgage life insurance) the amount you’re covered for decreases over the duration of the policy. This type of policy is generally used to cover a decreasing debt like a mortgage. Because the amount you’re insured for reduces over time, this type of policy is usually cheaper than a level term policy.

Whole-of-Life Insurance Policy

A whole-of-life policy is ongoing, which means the insurer pays out whenever you die, providing you have kept up with the payments. As you will die at some point, it is guaranteed that the insurer will have to pay out therefore, this type of policy is more expensive than term life insurance policies.

3) How much does life insurance cost?

The cost of life insurance will vary depending on how much the policy pays out and how long it lasts, but cover can start from as little as a few pence a day.

Other factors that influence life insurance quotes are your age, lifestyle, health, whether you’re a smoker and if you have a risky occupation or past time. The younger, and therefore generally healthier you are when you start your policy, the less of a risk you are deemed to be by the insurer at that point. This means your monthly premiums will be cheaper the sooner you take out a policy.

When considering life cover, you can look at it in terms of the payout amount e.g. enough to cover your remaining mortgage, or the monthly premium amount e.g. what you can reasonably afford to pay each month. Ultimately, the lower the monthly premiums the lower the payout amount, so it is important to find the right balance for you.

4) Should I get a joint life insurance policy with my partner?

Joint Policy

Getting a joint life insurance policy with your partner will usually work out slightly cheaper. If you don’t have children, it’s much more straight-forward to set-up a joint policy than two single policies, plus you’re only likely to need the one policy if your partner will be the only beneficiary.

However, the policy will only pay out once, usually on the death of the first policyholder. Also, if you split up with your partner it may be necessary to get two single policies, which are then reassessed based on your age and health status at that point, and are therefore likely to be more expensive.

Two Single Policies

Two individual policies generally provide better value, as they’re only marginally more expensive. It means that if both you and your partner die within those terms, your children or other beneficiaries will receive double the payout.

5) Can I still get life insurance if I have a medical condition?

Yes. If you have a pre-existing medical condition you should still be able to get life insurance, as there is so much competition in the market. Depending on the nature and severity of your condition, it may impact on the range of policies available and the affordability. Alternatively, you may be able to take out insurance that will exclude that condition, so if you die from an unrelated illness, you are still covered.

It is crucial that you disclose all existing health conditions at the point of making an application. Insurers can reject claims if you die as a result of a pre-existing medical condition that you hadn’t told them about.

An experienced adviser should be able to recommend specialist life insurance providers that are likely to be more compassionate towards your situation.

If you’re a smoker and are considering quitting the habit, it’s best to do so at least a year before applying for life insurance. Most providers will only consider you a non-smoker if you’ve been nicotine-free for at least a year, some even insist it has to be five years.

6) Will my dependents have to pay tax on the life insurance payout?

A life insurance payout isn’t subject to income or capital gains tax. As life insurance can be counted as part of your estate, it can be liable for inheritance tax (IHT).

To ensure that proceeds are not hit with a huge tax bill, the policy must be written in trust at the time it is taken out. This means the provider will pay out directly to you dependents. Most policies offer the option to do this at no extra cost, but we recommend seeking the help of a Financial Adviser or Solicitor so that it is done correctly.

7) Are there any payout exclusions?

There is very rarely any dispute as to whether a policy pays out – generally the only deciding factor is whether the person is deceased or not. However, it is vital to check the small print of any policy so that you fully understand any circumstances in which the insurer may not pay out.

Such circumstances may include death as a result of; an undisclosed health condition that existed before the policy was taken out, alcohol or drug misuse, suicide or self-inflicted injuries, involvement in war or terrorism or because of gross negligence.

8) What happens if I can’t afford my life insurance payments?

When taking out life insurance, you may want to consider supplementing it with a ‘waiver of premium benefit’. This means that if you’re unable to work due to illness or injury and can’t afford to pay the premium, it will be covered for a fixed period of time.

Other common add-ons include critical illness and terminal illness cover, which pay out a lump sum if you’re diagnosed with a serious or terminal illness that’s covered by the policy.

9) Is it ever worth switching life insurance policies?

If you already have a level term insurance policy, it may be worth comparing policies to see if you could get a better value deal elsewhere. This is more likely to be a viable option if you haven’t developed any other medical conditions since your first policy was taken out. Age will also influence your options. It is important to check the new policy’s terms and conditions thoroughly, ensuring it covers everything your current policy covers before making the switch.

10) Is life insurance the right protection policy for me?

Life insurance only covers the worse-case scenario, providing protection for your dependents in the event of your death. If you are single and have no dependents, then you probably don’t need it.

However, you may want to consider how you would manage if you became ill, injured, disabled or unable to work. Other forms of insurance like income protection, critical illness or payment protection insurance may be better suited to your circumstances.

To find out more about life insurance or any other kind of protection, book your free initial consultation with one of our friendly Insurance Advisers.
Call ADN Financial Solutions on 02392 822 616.

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