It's a sad fact that whilst most of us are quite happy to insure our car, our house and our travel arrangements to their full value, few of us take quite as much care over our health and loved ones. This guide will assist you in considering your own situation.
Understanding the products that are around and the sort of financial assistance they can deliver can be reassuringly comforting. The following information can educate you on the different products and options available.
Life insurance is designed to pay out a lump sum in the event of death. People often take out life insurance simply to repay their mortgage. This is normally insufficient to enable your partner and dependants to maintain a reasonable standard of living especially if you are the sole bread winner. You should also consider the devastating effect of losing your partner whether they work or not and should ensure they are covered too. Life assurance is relatively cheap because very fortunately, dying young is not that common, however the peace of mind of knowing that your loved ones will be financially looked after, is worth every penny.
Life insurance cover comes in many guises including Whole of Life, Family Income Benefit and Mortgage Protection. On top of this there are lots of additional choices such as level, decreasing & increasing cover, flexible term, renewable, joint life, first/second death, critical illness, terminal illness the list goes on…
Life insurance cover is important and we can help you find the policy that is best suited to your individual needs.
Whole of Life Assurance
As the name suggests, a Whole Life Policy is designed to provide life assurance cover for your whole life and doesn’t finish at a pre-defined term. If you continue paying into a Whole Life plan it will eventually pay out on your death, so they are normally significantly more expensive than the equivalent term assurance as they are effectively guaranteed to pay out their benefit eventually.
Some Whole of Life plans can be without an investment element but the idea of which is to build up a fund in the early years which is used to subsidise the high costs of life assurance in the later years. In some cases, this may provide you with a lump sum if you cash in the plan after many years, but it is not a savings plan, the insurer is effectively buying themselves out of the ongoing life assurance risk. In most cases even if the fund runs out of money, the Whole Life plan will still provide the death benefits originally agreed, but you should carefully check your policy wording.
In most cases, premiums are fixed for the term (whole of life) of the policy but in some cases premiums are review-able based on the investment return and may need to be amended depending upon investment returns.
Whole of Life plans and Inheritance Tax
Whole of life policies are often used to provide a cash sum to cover the estate liability to Inheritance Tax on death. They can be relatively inexpensive at pre-retirement ages and particularly on joint life second death plans which only pay out after you and your partner are both deceased. The reason they are useful and relatively inexpensive, is that if you are married your partner will not pay any IHT on your death (and vice versa) but when the second life dies the whole estate will be subject to IHT. The Whole of Life plan is written in trust (thereby not attracting IHT on the lump sum payable on death) and pays out to cover the beneficiaries IHT liability.
This is just one option to look at if you will have a significant IHT liability on death. We specialise in effective tax planning across income tax, capital gains and estate planning. Please contact us on 0345 5000 909 if you wish to discuss any aspect of your finances with us.
Tax treatment varies according to individual circumstances and is subject to change.
Inheritance Tax & Estate Planning advice is not regulated by the Financial Conduct Authority.
Critical Illness Insurance
Critical illness insurance pays out a lump sum if you are diagnosed with a critical illness. It can help pay for care or treatment and cover lost income. Typical illnesses covered are heart attack, cancer, stroke and coronary artery by-pass surgery. Other conditions that might be covered include Alzheimer’s disease, blindness, deafness, kidney failure, major organ transplant, multiple sclerosis, HIV/AIDS, Parkinson's disease and paralysis. Not all contracts provide all the cover you may need, it is therefore important that you do not shop for a policy purely on price alone. Critical Illness cover will normally be combined with life insurance.
Income Protection Insurance
Income Protection Insurance replaces your income in case you are unable to work through illness or injury, it does not cover redundancy. The insurance policy will replace a significant part of your lost earnings, typically half to two-thirds of your salary. As it is a Tax-Free benefit this will replace most of your lost income. Unlike accident, sickness and unemployment cover, it will continue paying until you go back to work or you reach your retirement date. It is sometimes offered by employers as part of an overall benefits package and is a very valuable benefit.
The name says it all. It's term assurance, as you only get a payout within the set 'term' e.g. 18 years. Its level, because the payout you get is fixed from the start of the term until the end. Level term assurance thus guarantees a known lump sum payout upon death within a fixed time e.g. £150,000 if you die within the next 18 years.