Insurance World

Most individuals have some form of insurance, whether it is for their vehicle, home or health. But it is important, however, not to overlook the benefits of life insurance, which pays money to beneficiaries when the insured dies.

HOW LIFE INSURANCE WORKS

Typically, the insured person makes payments into the plan - called premiums - in exchange for a “death benefit,” the money that is paid at the time of death. If you are considering purchasing life insurance there are a few potential problems you need to be aware of.

DIFFERENT TYPES OF LIFE INSURANCE POLICIES

There are numerous types of policies you can choose, but life insurance policies generally fall into three categories - protection, long-term savings and estate conservation.

Many people purchase life insurance for the purpose of providing for their dependents in the event of their death, thus protecting your existing stream of income. If you are in the protection category you may want to consider term life insurance, which offers only a death benefit for a specified period of time such as until you retire.

If long term savings is your reason for purchasing insurance, you may consider a cash value policy. With this type of life insurance, your beneficiaries receive a payment upon your death based on the full amount of coverage , not the cash value of the plan. The value of these plans is usually tied to an underlying investment portfolio and that is how funds accumulate.

Another added benefit is that these policies usually allow a holder to borrow from the accumulated funds in the plan without taxes or penalties. Depending on the policy, you can typically withdraw a portion of cash value and not pay it back, or even cancel the policy and receive the money that has been accumulated over the years.

USE LIFE INSURANCE FOR ESTATE PLANNING

Life insurance can also be used as an estate planning tool, especially if your goal is to preserve wealth for future generations. This type of policy covers one or two lives; the cash generated by these plans typically helps your heirs pay estate taxes and provide otherwise.

Now you have to decide how much coverage you need to provide the amount of income your family will need in the event of your death. After all, your goal in purchasing life insurance most likely is to ensure that income continues for those who are now dependent upon your income.

WHO NEEDS LIFE INSURANCE?

It also is important not to ignore the need for life insurance protection in a single or dual income family. The death of either spouse could create a financial strain on your family.

Protecting your home
Although you have no legal obligation to insure your home, your mortgage company will want to protect their investment with buildings insurance. However, it is also worth protecting your own investments, so even after you’ve paid off your mortgage, you should ensure you’re financially covered.

Home contents insurance and personal possessions insurance
According to Money Observer, the average home has Ј44,000 of contents and replacing this without insurance would be almost impossible for most people. An average premium is about Ј150 a year and will provide cover up to Ј50,000. The majority of contents insurance policies additionally provide public liability and personal legal expenses and although most people don’t claim on these, they could be very useful if needed.

Personal possessions insurance is worth taking out because often it covers your belongings outside the home, as well as inside the home, and is often incorporated into your contents insurance. Personal possessions insurance is also frequently referred to as all risks insurance and offers cover on possessions that are lost or stolen outside of the home.

Income protection
Income payment protection insurance is recommended by most insurers as the most appropriate way to safeguard your mortgage repayments and any other monthly bills. Kevin Carr, a senior technical advisor at LifeSearch believes that this is a better option than payment protection alone, including accident sickness unemployment (ASU) and mortgage payment protection insurance (MPPI). In a recent statement, Carr revealed that “the banks and mortgage lenders make huge profits from sales of payment protection. For instance, 17% of Lloyds TSB’s profits come from this.”

Debts – you don’t want them to haunt you
In addition to safeguarding your income to assist with loan repayments, you may also wish to consider personal finance products such as life assurance and critical illness insurance, which, under certain conditions provide a lump-sum that can be used to pay off the mortgage in difficult circumstances. The choice of life assurance or critical illness cover will depend on personal variables. For example, if you are single and have no dependents, then nobody would benefit from your life being heavily insured. However, should you be diagnosed with a serious illness, a lump sum might be helpful to ensure you maintain a reasonable quality of life. Personal accident plans can be helpful if you believe the specific conditions of the policy would be relevant to you. Examples include insurance providers such as Nationwide who will provide cover of around Ј50,000 for the loss a limb, Ј10,000 for a hip and Ј2,500 for a toe, in relation to a premium of Ј4.95 month.

Health insurance / private medical insurance
There are many difference financial products available for insuring your health and they vary in accordance with your stage as life. Examples include critical illness insurance, as discussed above, as well as long-term care insurance and medical insurance, which may also be referred to as private medical insurance or simply health insurance. Wikipedia argues that health insurance is one of the more controversial forms of insurance due to the tumultuous debate of insurance companies remaining solvent, against the needs of its customers to actively protect their health.

One of the main problems insurance companies face is the issue of “adverse selection”, a term used to describe the increased likelihood of sick people signing up for health insurance. Health insurance companies argue that those people seeking health insurance are often those with existing medical problems, those who are much more likely to have medical health insurance problems in the future and those who may engage in “risky behaviour” such as excessive alcohol consumption and smoking. Products such as health insurance tend to fuel fiery debates of the moral argument of health insurance costs and the question that if people pay for health insurance, are they more likely to lead a “risky” lifestyle in the knowledge that they are covered.

Travel insurance
Travel insurance isn’t complicated, but there are a few considerations you should bear in mind. Travel insurance typically covers issues such as cancellation, loss of baggage and medical expenses. However, Money Observer ( http://www.moneyobserver.com/ ) recommend better value by including baggage cover in your personal possessions insurance and not as part of your travel insurance policy. The consumer financial magazine also recommends extending your motor insurance – to ensure your car is covered when driving abroad.

Moneynet ( http://www.moneynet.co.uk/ ), a personal finance consumer information site, makes the point of shopping around for your travel insurance and avoiding the high street travel agents. According to their insurance guide:

“Since January 2005, it is especially important to avoid the travel agents when buying travel cover; from that date, the insurance industry falls under the regulation of the Financial Services Authority, giving that body the ability to investigate and take action on behalf of consumers. Tour operators and travel agents, however, are not subject to this regulation, so if you have a complaint about travel insurance purchased from a travel agent, the FSA and the Financial Ombudsman Service will not be able to intervene on your behalf.”

In a recent press release, moneynet also blasted high street travel agents for exorbitant insurance, stating that, “major high street players like Thomas Cook, Thomson and Travelcare, which between them account for around 70 % of the travel insurance market, levy premiums that are typically twice as expensive as buying cover online.”

Weddings – insure your finances for better and for worse
Insurance may not be romantic, but it’s important and if your wedding doesn’t go according to plan, it can be very expensive. Wedding insurance will typically cover dress damage, loss of rings and retaking the photographs if anything goes wrong with the photographer or prints.

Insurance doesn’t always come with guarantees, but shopping around to make sure you have the most appropriate protection for yourself, your partner and your family will give you a certain amount of peace of mind.

Disclaimer:
We only show you the way – it is up to you to follow the path of enlightenment. All information, is intended for general information only and should not be construed as advice under the Financial Services Act 1986. You are strongly advised to take appropriate professional and legal advice before entering into any binding contracts.