Insurance World

Owning a life insurance policy may seem a little ridiculous to some people. After all, it is not like auto insurance or health insurance. The buyer of a life insurance policy is not likely to get any direct benefit from the purchase. So why bother with a life insurance policy? There are actually quite a number of good reasons.

Perhaps the single most important reason to have a life insurance policy has to do with those you will leave behind. You’ve shared your life with these people, and the last thing you want to do is place financial burdens on them once you are gone. What if you die after a lengthy hospital stay? Sure, you have life insurance, but chances are that any serious illness will exhaust that coverage and still leave deductibles and expenses above and beyond those covered. A good solid life insurance policy will take care of any medical expenses that were not covered by your health coverage.

In like manner, a good life insurance policy insures that your final expenses are taken care of in a way that lifts much of the burdens of financial matters off your survivors and allows them time to grieve. While many funeral parlors have pre-paid plans and there are insurance packages that specifically address death expenses, chances are neither of these options will completely cover everything. Just as your life insurance policy kicked in and made up the difference in your last medical bills, it can help cover those variable expenses related to your funeral and final resting-place.

Moving beyond the matter of your final expenses, there are other financial matters your life insurance policy will address. As an example, do you own your home? Or to be more specific, is your home owned jointly by you and the bank? If you are the sole source of income for your family, that revenue stream will dry up at your demise. Funds from your life insurance policy can keep the family afloat as they work through their grief and face the future. And that policy can ensure they have a roof over their heads while they adjust to you not being around.

A good life insurance policy not only provides assistance at the time of death; it also can have an influence well in to the years to come. For instance, careful planning will help you determine how much insurance you need to take out in order to help your family with immediate needs, but also have funds set aside that can help your children attend college later in life. By making sure your life insurance policy is adequate, you have made it possible for your children to continue their education and enter into careers that have meaning for them. What better legacy can a parent leave a child?

Also, your life insurance policy could provide funds that would assist your spouse in later years as well. Assisted living facilities and retirement homes are expensive. By making sure your life insurance policy allows for this possibility, you can help take care of the person you had planned on living with into ripe old age.

Even if you do not have a family to support, or if you are older and no longer have any relatives who depend on you financially, a life insurance policy is still a good idea. Chances are that you do have a cherished friend or a non-profit organization that means a great deal to you. Charities that depend on donations to keep going would welcome your support. If there is a charity or a place of worship that has occupied a special place in your heart, consider using life insurance as a way to ensure that the organization will continue to touch lives for many years to come. In like manner, if there is a close friend who has been there for you through thick and thin, provide him or her with one last parting gift of your resources, as one more way to let your friend know you care.

A life insurance policy can provide a lot of piece of mind. While it is true the policy will not directly benefit the buyer, it will provide the very important benefit of knowing that people and places that are near to your heart will continue to know you care.

Life insurance – what is it & how does it work?

Life insurance is the simplest, most popular and cost effective way to financially protect any dependants in the event of your death. While it won’t help those left behind to get over their loss, the benefit of a lump sum, in most cases tax-free, will guarantee your family aren’t deprived of funds during an already stressful time.

With the cost of life insurance at an all time low, now is the perfect time to arrange cover. For those in good health, a policy that was taken out six years ago can be replaced today for significantly less, despite the fact that being older, one is in theory at greater risk. The industry over-reaction to the threat of AIDS initially caused premiums to rocket skywards, but when the expected epidemic failed to materialise, costs fell rapidly from the mid 1990s onwards.

Life insurance premiums vary from person to person, with factors such as age, gender, current and previous health, lifestyle, term required, occupation and smoker status all having an influence. Risk is assessed with the use of what’s known in the industry as ‘mortality tables’ to determine the premium for a particular individual, to which a ‘loading’ may be added which takes further account of other factors relating to medical history and lifestyle.

Whole of life versus term life insurance

Life insurance can be split into two main types, known as ‘whole of life insurance’ and ‘term life insurance’. In essence, as the name suggests, whole of life insurance provides cover for the lifetime of the policyholder, whereas term life insurance provides cover for the duration of an agreed period in time. For all policies it’s crucial to ensure that premium payments are kept up to date to keep cover in place.

Whole of life insurance

Whole of life insurance tends to be the more expensive option, though often has the advantage of being more flexible. It can fulfil many purposes including personal protection, family protection and inheritance tax planning, and can be combined with a term life insurance policy to cover specific debts as required.

Typically, policyholders’ contributions are invested and life insurance benefits are ‘purchased’ using the investment fund. The fund’s performance, along with other factors, has a significant effect on the level of future benefits. As the policyholder’s age increases the cost of the insurance increases, thus reducing the sum in the investment pot. The investment element varies from insurer to insurer; some are more generous payers than others, making the expert advice of an insurance broker or independent financial adviser invaluable in choosing such a policy. Some plans require contribution until the policyholder’s death, some for a set period of time, and some up until a certain age is reached, with additional options available to cover specific illnesses or disability. The common factor throughout is that cover is maintained for the life of the policyholder, making whole of life insurance a very popular way to leave dependants a nest egg.

One great benefit of whole of life insurance is that the guarantee of a payout on the policyholder’s death, at whatever point in time that may be, removes much of the guesswork involved in other types of life insurance. As long as premiums are maintained, cover is assured. Although the more expensive option, it’s important to note that premiums are lower than those one would pay in later life by repeatedly renewing term life policies.

Term life insurance

A simpler option, term life insurance offers basic cover for a set number of years, usually at low cost. A term life insurance policy requires a regular premium payment and pays out a lump sum on the policyholder’s death providing this occurs within the term of the policy. Death outside of the term to which the policy applies won’t result in a payout, meaning the loss of any investment made, making it particularly important to be sure that cover is adequate and the term is appropriate.

Some policies can be extended to provide critical illness cover; full disclosure of all medical conditions, existing and historic, is vital when arranging this to avoid a denial of payment just when it’s needed most. It’s also imperative to be certain exactly which conditions the policy covers, as insurance companies are notoriously specific as to the illnesses they’ll pay out for!

Term life insurance cover can be further categorised into these types:

Flat-rate (or level) cover - offers a set amount of cover for the policy term, fixed from the outset.

Decreasing (or mortgage protection insurance) cover - cover decreases over the term of the policy, often inline with a diminishing mortgage debt.

Family income benefit – pays out a regular income rather than a lump sum during the policy term.
Increasing term assurance - premiums and benefits increase each year, usually in line with inflation, allowing the protection of a lifestyle.

Convertible term assurance – gives the option to convert to a whole of life policy without giving new information about your health.

How much cover do I need?

It’s important to correctly identify your dependants’ financial needs to establish just how much life insurance cover to arrange. A general rule is to choose a policy providing at least ten times your salary, but more may be appropriate, with the amount varying depending on how you intend it to be used. Basically you decide how much you want your dependants to receive in the event of your death, and your premiums will be determined accordingly.

Don’t overlook factors like:

• Mortgage repayments
• Replacing the primary earner’s salary
• Replacing childcare
• Education expenses
• Outstanding debts
• Support for a business partner

What do I need to look out for?

Before signing anything, look carefully at the terms and conditions of your proposed life insurance policy giving particular attention to any regulations pertaining to payouts. Some policies may not, for example, pay out if death is caused by participation in certain dangerous sports or activities.

In the case of index-linked policies which allow for economic change, it’s important to establish whether the policy is linked automatically or whether there’s the need to opt-in to linkage each year; failure to do so could result in being locked out of future linking.

Though life insurance payouts are usually tax-free, there are circumstances where taxes will apply. A life insurance policy can be placed ‘in trust’ to protect revenue and provide payment more quickly, though this is a complex issue which needs professional advice for clarity before proceeding.

A joint-life policy is a popular and often less expensive option for couples which covers the two of them simultaneously, with options for payout on a first-death or last-survivor basis.

How much will it cost?

The cost of each different policy offered by a life insurance company varies widely, and depends on a number of factors: the type of policy, the length of the policy term, the size of the death benefit, the flexibility of the policy, number of people covered by the policy and so on.
The only certainty is that the longer you delay getting life insurance, the more expensive the premiums will be!