What is Life Insurance?
Life insurance can provide a cash lump sum to support your dependants when you die. How much this will be, who it will go to and how long the term of the policy is will depend on your individual circumstances.
Why do I need life insurance?
Life insurance is designed to provide cash quickly after death, and can replace the earnings your dependants have come to rely on. It can take time to settle a Will (especially if your estate is subject to probate) but funds released from life insurance can be used how ever your dependants wish:
- To help pay for your funeral
- For daily living expenses
- To pay off a mortgage or other debts*
- To save for university or invest for the future
If you do not have children, or other dependants who rely on your earnings, you may not need life insurance. The amount of cover you need will likely depend on your answers to the following:
- How many dependants rely on you for living expenses?
- In the event of your death, how would your dependants lives change? Would your family need to leave their home?
- How long would it take for them to become self-sufficient?
Andrea’s multiple insurance deal headache
Andrea had always sourced cheap insurance deals online for mortgage cover*, life insurance and family protection. After managing her protection in this way, Andrea wasn’t sure what her options were, or what she was protected against. Andrea came to Wren Sterling to better understand her policies, how they worked together, and find out if she was getting the best deal. Our independent financial advisers are able to source products from a fair analysis of the market, and can find products which aren’t listed on comparison websites.
We reviewed Andrea’s protection arrangements and placed them in trust. Now, after her death, the benefits from any policies will go to her trustees, without waiting for her estate to be valued. This means that this money will be available to pay for any funeral arrangements or unexpected costs, without increasing her inheritance tax bill.**
Learn more about life insurance in this video from the Money Advice Service.
How does life insurance work?
Life insurance is an agreement between you and the life insurance company. You agree to pay them an amount (usually monthly) for a set period of time, and the insurer agrees to pay your benefices an amount of money if you die within the set time.
Different insurance providers offer different rates, so it can pay to shop around.
There are two different types of life insurance, term life insurance and whole of life insurance.
Term Assurance – This type of cover has a defined term, designed to offer cover for a specific length of time, but how much cover depends on the sum assured on the policy.
- Level cover – Offer a fixed cash sum upon the death of the assured.
- Decreasing cover – Offers a cash sum upon the death of the assured – however the amount offered will decreased over time, designed to cover the assured where they have debts (such as a mortgage*) in the event of death before the end of the term.
Whole of life insurance – This policy will provide a cash lump sum on death – as long as you keep up with the monthly premiums. As such, these policies are often more expensive than other term policies. There are two forms of whole of life Assurance, one can be investment linked or purely insurance based.
What about Critical illness cover?
Life insurance will not pay out if you’re unable to work due to illness or injury. Critical Illness cover is designed to pay out if you are diagnosed with a specified critical illness detailed within the policy schedule.
If you’re thinking about life insurance and Critical Illness Cover, it could be worth considering Combined Cover – which can be cheaper.
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* Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
**Please note, all names in this case study have been changed to protect the privacy of individuals.