Although many understand why life insurance is a good thing, a shockingly high proportion of individuals are unwilling to take out life insurance due to the belief it isn’t worth the expenditure – surveys have suggested that only 30% of Britons have any form of life insurance in place at all.
While thinking about death is seldom pleasant, it is still important to have a plan in place for your loved ones should the worst happen whether you choose life insurance or a different option entirely.
What is life insurance?
As you may already know, life insurance is a form of personal protection that can pay out money to your family if you die while you are insured. It may also pay out if you are diagnosed with a terminal illness and not expected to live for more than 12 months.
There are many different kinds of life insurance policies. One example is Term Insurance, which is what most people think of when you discuss life insurance; you pay a regular premium and are covered for a pre-determined amount of time. You can also choose what sort of term you would like cover for:
1: Level – Your estate is paid a lump sum if you die within the agreed term. The cover agreed is determined at the beginning of the policy and stays the same throughout.
2: Increasing – The amount of cover your family would receive rises with inflation.
3: Decreasing – The amount of money your beneficiaries would receive decreases over the course of term. Sometimes also referred to as mortgage term life insurance, it is designed for those with a repayment mortgage who will still be financially secure with less cover as the total outstanding mortgage decreases.
Alternatively, you could opt for whole-of-life insurance, also known as life assurance. Whole-of-life insurance comes with a higher premium, but can run indefinitely (as long as you keep paying your premiums) and pay out when you do eventually die. These provide long-term reassurance that your family will be financially secure no matter when you pass away.
Unfortunately, this does mean that you could end up paying more in premiums than your insurance would pay out, depending on when you die.
How much does life insurance cost?
Insurance premiums tend to vary in price based on the individual applying for cover. Some of the factors that may be taken into consideration include:
- Age – generally younger policyholders will pay less in premiums compared to older policyholders.
- Physical and Mental Health – any pre-existing medical conditions could come into account.
- Lifestyle – Whether you smoke, drink or partake in dangerous hobbies could have an effect on your premiums.
- Occupation – having a dangerous job will likely make your premiums higher.
- Your family’s medical history – you may need to pay more or certain causes of death may be excluded if you have a genetic history of hereditary illness.
Can I take out a joint plan with my spouse?
It is indeed possible to take out a joint plan with your partner, and doing so could be a good idea if you depend financially on your combined income. Should one of you pass away, the payout will go to the surviving spouse unless you arrange for that money to go elsewhere. A joint plan will likely be more cost-effective than covering yourself separately.
Who will receive money if I die while covered by life insurance?
In most cases, you can choose who will receive the payout should you pass away while covered, but you will need to make sure that the necessary legal documents are in place to ensure the payout goes to the right people. You can either write your life insurance plan in trust (which can make it easier for beneficiaries to claim) or decide who will benefit in your will.
If you die and you do not have a will nor have your policy written in trust, the person who would receive the payout will be your next-of-kin as determined by rules of intestacy. Don’t just assume that the rules of intestacy will benefit whoever you would have chosen – unmarried partners cannot benefit through the rules of intestacy and in some circumstances, ex-spouses could inherit instead!
Having a plan in place for your estate is never a bad idea. Our partner company, Starck Uberoi Solicitors, can offer assistance with drafting your will – see the Wills and Probate page on their website for more information, or call 020 8840 6640 to book an appointment.
How much will be paid out?
If you pass away over the agreed term, the amount you receive will depend on how much cover you had agreed when you began the policy. In most cases, the more you pay in premiums, the bigger the payout usually is – though of course other factors about the individual may be taken into account.
When deciding on how much cover to pay for, you should consider:
- Any outstanding debts you may have, including a mortgage
- How much you (and your spouse) both earn
- How many people you financially support and how much they need
- The cost of funeral arrangements
Is life insurance paid out in a lump sum?
It can be, if you would like. Alternatively, you can arrange for the payout to be paid to your loved ones over a period of time if your insurance provider allows.
How is a life insurance payout affected by tax?
Usually, a life insurance payout will not incur income tax or capital gains tax to the beneficiaries. However, depending on the value of your estate and how your estate is to be divided (usually within a will or trust), inheritance tax could be payable on anything over your inheritance tax threshold.
If you’d like to know more about your inheritance tax liability, our retirement planning team can provide in-depth tax advice tailored to your specific circumstances.
In what situations may life insurance not be paid out when I die?
The vast majority of life insurance claims are successful, but there are a few circumstances in which a life insurance claim may be declined. If you lie or withhold information during the application stage (such as by failing to mention a pre-existing terminal illness you have been diagnosed with) this may prevent your loved ones being able to claim after your death. Don’t take the risk!
Plus, many life insurance policies contain exclusions, meaning that your insurance will not pay out if you die from certain causes of death. Common exclusions include:
- Deaths relating to a pre-existing condition: For example, if you are diabetic, your insurer may not pay out should you pass away due to a heart attack or a stroke. Your insurance provider should confirm that this will be the case before you take out your policy.
- Deaths caused by dangerous activity: Your insurance policy may include an exclusion for “inherently dangerous activity,” meaning that your claim may be declined if you died doing something dangerous. This can include certain extreme sports – make sure you check with your provider what they define as dangerous behaviour if you have any potentially dangerous hobbies.
- Deaths caused while committing crime: The majority of life policies will not pay out if the policyholder died while engaging in illegal activity, for example if they were driving while under the influence of drugs or alcohol.
- Suicide: Many life insurance policies include a “waiting period” which means they will not pay out if the policyholder commits suicide within a certain period of time after taking out the policy. This may sometimes include if the policyholder dies as a result of alcohol or drug misuse.
If you are experiencing suicidal thoughts or are considering ending your life due to debt, please seek help. You can call the Samaritans at any time of day on 116 123, or the National Debtline on 0808 808 4000. Both services offer free and confidential support. - Murder by a beneficiary: While certainly an uncommon occurrence, there are plenty of stories about would-be beneficiaries trying to claim on their loved ones’ life insurance. However, the rules of forfeiture dictate that a criminal cannot legally benefit from their crime; therefore, although other beneficiaries would still receive their share, the murderer will not receive theirs.
Some insurance policies will also not pay out if the policyholder dies in any circumstance for a set period of time after taking out the policy, although policies with this feature tend to return any premiums paid should the policyholder die before a claim can be made.
Can life insurance provide cover if I become critically ill?
Many insurance providers have policies available which can pay out if you are diagnosed with an illness or receive an injury that leave you disabled or unable to work. These can be combined with general life insurance, though you should be aware that there may be certain illnesses or disabilities they do not cover – for example, most critical illness insurance policies will not pay out for illnesses that you have a family history of.
There are also a wide range of other insurance policies which can be used to protect your family’s financial security in a range of circumstances, such as income protection. If you want to know more, book an appointment with our financial planning department today by calling 020 8037 4027 or emailing info@suwealth.co.uk.
Is life insurance really worth the money?
Life insurance is certainly worth the money for many people who may not realise it. For example, if you have a mortgage secured on your home, life insurance can ensure that your family can afford to stay in their home in the event of your death. When making a decision, it is best to consider how else your loved ones would cope financially if you passed away, and consider how much cover is likely to cost for you.
Our chartered financial planning team can help you determine how much cover you should arrange. We will explain to you how much you would be likely to pay in premiums, how much cover you receive, and how much cover you may need to ensure your family is financially secure should the worst happen.
How Starck Uberoi Wealth can help?
Our financial planning department can give you peace of mind by discussing your options with you, so you know your family will be protected should you unexpectedly pass away. We will take into account your financial circumstances, what is important to you and your future financial plans before making a recommendation that is best for you. To find out more, please see the personal protection page on our website. To book an appointment, please call 020 8037 4027 or email info@suwealth.co.uk. Our offices are located in Brentford and Ealing, easily accessible via bus services and only a short walk from local railway stations.