Life insurance is a simple and cost-effective solution to protect your family and loved ones in the event of your death by paying out a cash lump-sum amount.
If written into trust, the policy proceeds can be paid out tax-free on a claim.
The lump sum can be used to pay-off a mortgage; or to create a continuous income to ensure your family are given financial security even when you’re no longer around.
Death is the one certainty in Life! Not knowing when it will happen is an uncertainty you can insure against. If you died tomorrow, how would your family keep a roof over their head, eat and keep warm?
Guaranteed premiums ensure you know for certain that the cost of your premiums won’t change throughout the term of the plan. It’s important to know the younger you are when you take your policy out, the lower the premiums; as you are seen to the insurance company as lower risk! So, it makes sense to know you’re protected for the long term and take out cover on your life as early as possible.
These plans 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.
For example, if you are 30, a non-smoker and in good health, then a premium of around £10 per month could provide your family with a lump sum of £175,000 in the event of death before the state retirement age of 68.
Which option is best for you?
Roxburgh Financial Management was set up to provide specialist help to people unsure how to go about choosing from the many Protection products available. For example, at no extra cost it is possible to include cover for your children and many companies now offer cover which will pay out in all events without any exclusions. So it’s important to make sure that if you’re buying a policy it’s the right one for you.
Our specialists will help you navigate all the options to find the best cover that is right for you and your family at an affordable rate.
Six reasons to use us
- We do not charge for our advice
- We will explain the good the bad and the ugly
- We will ask the right questions
- We do all the work, right through to completing the application form
- We can access the full range of insurance providers
- We are regulated and authorised by the FCA
Types of Life Insurance
There are several types of insurance available dependent on your individual circumstances. Listed below are the different types of life insurance:
Level Term Life Insurance
A Level Term life insurance is the most straightforward type of plan available. The plan holder pays a premium, usually each month, to the insurance provider to ensure that an ‘agreed amount’ (the benefit) is paid out should the person insured die within the agreed number of years (the term) that the insurance is in place. Level Term life insurance is commonly used to pay off an interest-only mortgage (as the debt remains the same over the life of the mortgage) or provide simple family protection.
Decreasing Term Life Insurance
A Decreasing Term life insurance starts off at an ‘agreed amount’ (benefit) and then reduces over the length of the term. The plan holder pays a premium, usually each month, to the insurance provider to ensure that the ‘decreasing amount’ (the benefit) is paid out should the person insured die within the agreed number of years (the term).
The amount you pay (the premium) is fixed throughout the term of them insurance (policy). The premium level is lower than that of Level Term insurance due to the benefit amount decreasing. Decreasing life insurance is commonly used to pay off a repayment mortgage, with the term of the plan matching the outstanding term of the mortgage. The plan is designed to repay the outstanding mortgage balance subject to: all mortgage payments being made, no alterations to the term throughout the plan and that the interest rate does not exceed a specified level.
Increasing Term Life Insurance
With Increasing Term life insurance, a sum assured (benefit) is chosen which increases over time. An insurer is paid a monthly premium by the policy holder throughout the term to ensure that the ‘increasing amount’ is paid out should the plan holder die within the policy term.
The sum assured will increase each year at an agreed rate, usually Retail Price Index (RPI) or the Consumer Price Index (CPI). This is called Indexation. As your benefit increases, so does your premium. Indexation is chosen to ensure the purchasing power of your selected benefit is ‘future–proofed’ as it will increase as the cost of living will go up – i.e. with inflation.
Whole-of-life insurance is an ongoing insurance without a specified term to ensure the proceeds are paid out whenever death of the plan holder occurs. Providing all premiums have been paid to date, the policy is certain to pay out whenever the event of death occurs which means premiums are usually more expensive than Level Term insurance.
Whole-of-life insurance policies are commonly used to pay Inheritance Tax liabilities and ensure more of an estate is passed on to beneficiaries. To ensure the proceeds of the life insurance policy are not included in an estate, though, it is vital that the policy be written in trust.
Family Income Benefit Life Insurance
With Family Income Benefit life insurance, the plan holder pays a premium to ensure that a regular income (the benefit) is paid to the family should the person insured die within the agreed number of years that the insurance is in place (the term). The benefit of Family Income Benefit life insurance is that the individual can choose to base it on individual circumstances, such as regular outgoings, school fees etc. making it easier to determine how much you need and more tailored to the individual.
For example, if your regular income provides you with £2,000 a month, then you can arrange for the policy to provide the same amount to be paid out to your family in the event of your death. It also means any decision-making by the beneficiaries has been removed at the point of claim as to investment plans etc. as the regular income amount has already been arranged.
Over-50s Life Insurance
An Over-50s life insurance policy does not have a fixed term and so pays out whenever death may occur. An amount to pay each month is chosen (the premium) which, along with the person to be insured’s current age, determines the lump sum that will be paid upon their death.
The premiums are guaranteed never to rise throughout the plan. Acceptance by the insurance provider is guaranteed for an Over-50s life insurance policy, without the need for medicals or reports.
However, there is an initial period of one to two years depending on the selected insurance provider, when the policy pay-out will only be a percentage of the total premiums paid to date. After this period has passed the full sum assured would be paid out in the event of a claim. These details vary from insurer to insurer.
Over-50’s life insurance policies are commonly used for people wanting to leave sufficient money to cover funeral costs or for people who, due to medical reasons, cannot get covered on a standard life insurance policy.
Joint Life Insurance
For couples who both want to be insured, there is an option of a joint life policy rather than two individual plans. The premium paid on a joint policy is likely to be less, although not significantly, than the premium spent on two separate policies.
However, if plan holders have financial dependents, you may feel the slight additional cost for two policies is worth considering, as it then means dependents potentially benefit from double the pay-out should both die during the policy term(s), either together or one after the other.
It is also worth considering, should there be a change in the relationship at some point during the plan term coming to an arrangement for continuing with a joint plan may not be possible and the policy may then need to be cancelled. At this point, obtaining replacement cover could provide difficult due to increased ages; or if there have been changes in state of health. This may make getting cover not possible or at the least more expensive than if a single life plan rather than a joint life policy had been taken out. Some joint life insurance policies will only pay out after the second death has occurred; which would mean after the first person dies the surviving partner would not receive a pay-out.
Life Insurance With Critical Illness
Most Life Insurance policies will give the option to include cover should the plan holder be diagnosed with a specified critical illness. Where life insurance will only pay in the event of death, a Life and Critical Illness policy also insures the plan holder in the event of diagnosis of a number of serious illnesses as defined by the insurer’s terms.
These conditions include, for example: cancer, heart attack, stroke, or multiple sclerosis. Most providers also include Children’s Critical illness as a definition. Plans may not cover all definitions of a critical illness. The definitions vary between product providers and will be described in the key features and policy document if you go ahead with a plan.
A combined life insurance with critical illness policy usually pays out in the first event of either death or diagnosis of a serious illness.
Often the price of a standalone critical illness plan is exactly the same as a Life policy with critical illness cover; so usually people take out a plan which would provide cover in the event of death or critical illness. This is due to certain insurer tax advantages available for life insurance plans and also the fact that there is much higher chance of suffering and claiming on a critical illness before death.
It’s also possible to take out a policy that can be claimed on in the event of a diagnosis of a critical illness and again in the event of death. Life insurance with critical illness policies provide financial support should the plan holder suffer a serious illness and survive; but where they may require lifestyle changes, such as reduced working hours, stopping work completely or even modifications to a home.
Ultimately, though, it’s up to you as the plan holder how you wish to spend the lump sum pay-out.
Low Start Life Insurance
Low Start life insurance is where the premiums are low at the beginning of the policy term and then rise each year at a fixed rate. The increases can often be opted out of, and in some cases switched to, level payments; which may then reduce the amount of benefit received.
The cost over the whole term may be higher than a level policy, but can help make the premiums more affordable earlier in the policy term and more able to get the cover need until the policy holder is in a stronger financial position. Low Start life insurance policies are commonly used by first-time buyers who may have a limited budget right now but need a fixed amount of cover for a mortgage.
Life Insurance Options
Like most things, the more options you choose to add on the higher the price can be. Life Insurance is no different and each insurer will load the various options differently. It is therefore essential to know what you need and also what you would like so we can find a solution to best suit you and your individual circumstances. Below are some of the various options available;
Guaranteed premiums can work in two ways. One type of guaranteed premium ensures that what you pay at the start of the policy term remains the same throughout unless you change the basis on which you are covered. Another type of guaranteed premium will still increase through the plan term but at a set rate determined at the outset of the policy. You can, therefore, calculate what your premiums will be in the future and have the certainty of knowing what you will pay without any unexpected changes in cost.
If you opt to have a premium which is not guaranteed then the premiums will be reviewable. Reviewable policies usually start cheaper than guaranteed policies, but will be reviewed at intervals set by the individual provider, often starting at the five year plan anniversary. Once reviewed the premiums may change up or down or they may stay the same but over the policy term, when compared to guaranteed premiums they may end up being more expensive.
Level Or Indexed
‘Level’ means that the amount you receive will remain the same throughout the time you have the insurance, regardless of whether your income or expenditure increases. Alternatively, the amount you receive can increase each year in line with inflation, using either the retail price index or the consumer price index.
Waiver Of Premium
If ‘waiver of premium’ is selected then, when you begin receiving an income from the insurance policy, the premiums paid will be refunded back to you until the claim finishes.
If a renewable term is chosen then cover can be extended at the end of the original term for a set period of time, in some instances without the insured having to provide additional medical information.
Some specified pre-existing medical conditions may be covered by some insurance providers but others may not. There are also exclusions specified by each individual provider; for example deaths related to alcohol or drug abuse may void the policy and result in non-payment of a claim.
If cover is provided on non-standard terms or even on smoker rates, and you change your lifestyle during the term in a way that you think should reduce the likelihood of a claim, for example you have stopped smoking, some providers will allow the cover to be reviewed mid-term.
A Convertible plan allows the plan to be converted to a Whole-of-Life policy without having to provide any further medical information. Premiums for this type of policy are higher at the outset than for standard life insurance policies. Once the policy converts to a Whole-of-Life plan the premiums are also likely to increase.
Cover Increase Options
There is often an option to change cover without further medical information if your circumstances change often due to a significant life event. Providers’ options vary but some examples are: marriage, divorce, increased mortgage amount, birth or adoption of a child, salary increase.
Accidental Death Benefit
Accidental Death Benefit will pay out if you die as a result of an accident while your application is being underwritten.
It’s recommended that a Life insurance policy is written into trust to avoid the proceeds of the plan contributing to the value of your estate. This can mean that any pay-out won’t be liable for Inheritance Tax (IHT)*. Putting your policy into trust not only means any pay-out is ring-fenced from your estate for Inheritance Tax purposes, leaving your family with a tax bill, it also means they can get the money much quicker as they can bypass probate.
Under current legislation the Inheritance Tax threshold is £325,000 for a single person or £650,000 for married couples and registered civil partners. IHT is charged at 40% on anything you leave over these amounts when you die. With the average house price in the UK currently £216,750 potentially millions of homeowners risk leaving a tax bill.
When a discretionary trust is set up, the insured person can name all of the people that may want to benefit from the plan proceeds in the future. Trustees are also named. The trustees are the people who will be the legal owners of the trust fund and responsible for managing the proceeds of the plan and distributing them amongst the beneficiaries.
* Tax treatment is based on individual circumstances and may be subject to change in the future. The Financial Conduct Authority does not regulate Tax and Trust Planning.
Terminal illness benefit will mean the Life insurance benefit will be paid out early if you are diagnosed with less than 12 months to live. Some providers will exclude this benefit in the last 12 or 18 months of the plan term whereas there are providers who will keep this benefit throughout the entire policy term.
Children’s Critical Illness Cover
Some policies include cover for any natural, adopted or step-children as part of their standard definitions. This benefit will pay out an additional lump sum if any of your children are diagnosed with a critical illness or die during the policy term.
Child Accident Hospitalisation Cover
With this cover a special payment is made if a natural, adopted or step-child is admitted to hospital due to physical injuries for a specified minimum number of consecutive days, immediately following an accident.
This is a special payment paid alongside a claim for critical illness where the insured person has a natural child, legally adopted child or step-child under 5 years old.