Protection
Protection
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
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.
What Is Mortgage Life Assurance?
Mortgage Life Assurance is designed to pay off the remaining mortgage debt on repayment mortgages and interest only mortgages if you die within a set period. It helps to ensure that your dependants needn’t worry about repaying the mortgage if you die.
Is it worth having?
It is sensible to consider cover when you take out a mortgage. It can be useful protection if you have a repayment mortgage or interest only mortgage, and people who are financially dependent on you.
How Much Does It Cost?
Mortgage Life Insurance has no investment element so is usually the cheapest form of protection. It is usually necessary to review the cover when moving home, or changing the terms on your mortgage
Costs depend on you
Policy costs increase with mortgage size and length as well as the likelihood of your death during the term. This means age and whether you smoke are big factors. For those who’ve quit smoking, once a year has passed, it is worth a re-quote as the price may have reduced substantially.
Again if you already have a policy and you have stopped smoking ask us for a re-quote as we may be able to find cheaper cover for you. Some Mortgage Life Insurance policies also factor in health, occupation and participation in risky sports. So a 21 year old, non smoking office worker, who enjoys healthy food and regularly visits the gym, will probably find their policy could have monthly premiums that cost less than they would for someone who is older and leads a less healthy lifestyle.
Consider writing in trust
If you die the life assurance payment will then form part of your estate. This may make the value of your estate liable to Inheritance Tax. In many cases you can avoid this by writing the policy in trust – which means the payment goes direct to the trustees for payment to your chosen beneficiaries, avoiding inheritance tax. This is relatively easy to do as with most insurance policies they include the option (and papers) for writing in trust directly, at no extra charge.
These types of plan will have no cash in value at any time, and will cease at the end of the term. If premiums are not maintained, then cover will lapse.
Inheritance Tax Planning and Trusts are not regulated by the Financial Conduct Authority (FCA).
Your home may be repossessed if you do not keep up repayments on your mortgage.
This article (What Is Mortgage Life Assurance?) is intended to provide a general appreciation of the topic and it is not advice.
For more information please contact Douglas Steers & Company Ltd on 0345 5000 909 or email advice@douglassteers.co.uk and we will be happy to assist you.
Article expiry: 06 Apr 2025
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With a bit of forward planning and the right protection products on your side, some peace of mind can be restored, leaving you to focus on what is really important. To keep your life on track whatever the knocks, call us today.
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