How to save money on Life Insurance
We realise that life insurance can be confusing. We hope this guide will help you to arrange your cover. Please click on the links to view the explanations:
What is life insurance?
Do you need life insurance?
How much life cover do I need?
How long should I insure myself for?
How to save money on life insurance
Do I pay tax on the payout?
What is 'terminal illness'?
What are 'Guaranteed' and 'Reviewable' premiums?
What is the application process?
Types of Life Policy - Explained
Policy Options - Explained
Life Insurance with Tax Relief - How it Works
Trusts - Explained
You may also see life insurance referred to as 'life cover' or 'life assurance' - all these terms mean the same thing. Life insurance is financial protection for your dependants in the event of your untimely death.
You pay premiums to the insurance company in return for being covered for the 'sum assured', which is the amount that will be paid out on death.
The cost of life insurance will vary depending on the size of the 'sum assured', your age, occupation, gender, whether you smoke and the term of the policy. The application form will also ask you certain medical questions. Pre existing medical conditions can affect the price you need to pay and insurers can refuse to insure you if you are too high a risk.
Basically, if you have dependents or a mortgage then YES.
Consider what would happen if you die today. Would your family be able to cope financially if you have insufficient life cover or no cover at all? Just spend a few moments thinking about the income your family will lose if you die, and the amount they will receive if you die.
The only people who don't need life assurance are those with no dependants at all. However some mortgage lenders will insist that you insure yourself even if you have no dependants.
How much life cover do I need?
A good rule of thumb is to insure your life for 20 x your annual net income plus the amount of any mortgages or loans. This will mean that on your death any debts can be cleared, and the residual lump sum can be invested producing a regular income (assuming a return of 5%) that will replace the income you were bringing in to the household.
If you can't afford to pay for the amount of life cover you should ideally have then the rule is to pay as much as you can afford. Set a budget and ask us how much cover that will buy.
How long should I insure myself for?
To answer this question you simply need to ask yourself why you are taking the life cover in the first place.
If you are protecting a mortgage loan, it would be sensible to choose the same term as your mortgage.
If you are considering dependant children, then insure yourself until your youngest child will reach an age where you would expect them to be financially independent. Alternatively, if your spouse would suffer financially, you must consider insuring yourself until retirement age.
How to save money on life insurance
You can save money by shopping around for cover. Our website is ideal because we access discounted rates from all the major insurers - saving you the task of visiting many different sites. You can arrange your cover through us cheaper than if you approach the insurer direct.
The other way to save money is to stop smoking. Non-smoker premiums are significantly lower. Please note that you must have not used any tobacco product (including patches) for at least 12 months to be classified as a non-smoker.
The payout from a life insurance policy is tax free, however, the money could then form part of your estate and be assessed for inheritance tax. This could account for 40% of your payout unless you are careful.
The easiest solution is to write your life insurance into trust. This means any payouts are made directly to your chosen beneficiaries, avoiding your estate and the Inland Revenue!
Please ask us when arranging your life policy, as we can easily help you get your plan in trust.
Most insurers give you 'terminal illness' cover free with your life policy. This basically means that if you are terminally ill, and medical opinion is that you are not expected to survive for 12 months, then the life policy will pay you immediately rather than waiting for your death to occur. Free terminal illness cover should not be confused with critical illness, which covers a wide range of survivable conditions and adds significantly to the cost of a life policy.
What is the application process?
After obtaining a quote on this website click 'Apply'. Then you can either:
a) Apply by completing online application,
b)
Click to request that we post your application pack to you for completion or
b) Telephone 0800 970 0457 and we will take your application by telephone
After receiving your application we will work with the insurer to arrange your cover. In many cases we can obtain acceptance and start your policy the same day. However the following situations may trigger the insurance company underwriter to ask for further information:
> Medical issues (including being over/underweight).
> Family medical history (particularly heriditary problems).
> A high sum being insured.
> Unusual/risky occupation.
> Hazardous pursuits.
> Foreign travel to risky locations.
The list of situations above is not exhaustive, but typically may trigger a combination of:
> Letter to your GP to request medical history.
> A medical examination.
> A financial questionnaire to justify a high sum insured.
> A questionnaire regarding hazardous pursuits.
Responses to the above will be needed before you are offered cover. In extreme cases the insurer may decline to offer cover, or cover may be offered at a higher price than originally quoted. In these situations we can try other insurers for you if you wish.
Remember we are not the insurer. We act as your broker to obtain cover for you at the lowest possible price.
Types of Life Policy - Explained
Level Term Life Insurance
These plans are commonly used for family protection. If you die during the plan term, the policy produces a tax free lump sum for your dependants.
The amount of life cover usually remains the same over the plan term selected, hence the name 'level term'.
Critical Illness cover can also be included in your plan. When you do this the plan will pay out the lump sum when you either die or are diagnosed with one of the listed critical illnesses. A life policy including critical illness cover will cost significantly more than life cover only.
Mortgage Decreasing Life Insurance
These plans are commonly used to protect a 'repayment' style mortgage i.e. where your debt to the lender reduces over the mortgage term. If you die during the mortgage term, the plan policy produces a lump sum which is used to pay off the outstanding balance of your mortgage.
Over the plan term, the amount of life cover reduces to match your outstanding mortgage loan - this helps keep the cost down as you are only paying for cover you need. This is usually the cheapest way of insuring your repayment mortgage.
Critical Illness cover can also be included in your plan. When you do this the plan will pay out the lump sum when you either die or are diagnosed with one of the listed critical illnesses. A life policy including critical illness cover will cost significantly more than life cover only.
Family Income Benefit
These plans are commonly used for family protection. However, rather than producing a lump sum should you die during the selected term, the policy produces a regular tax free income for your dependants for the remainder of the plan term.
Critical Illness cover can also be included in your plan. When you do this the plan will pay out the lump sum when you either die or are diagnosed with one of the listed critical illnesses. A life policy including critical illness cover will cost significantly more than life cover only.
Whole of Life
The plans are commonly used for inheritance tax planning. The policy continues for as long as you continue to pay premiums and pays out on death, whenever that occurs. Most whole of life policies are arranged with 'reviewable' premiums i.e. the insurer will increase premiums, and this can get expensive. A few providers are now offering whole of life plans with 'guaranteed' premiums, albeit at a cost.
Critical Illness
Critical Illness insurance will pay you a tax free lump sum on diagnosis of any one of a wide range of critical illnesses including cancer, heart attack, stroke, brain tumour and many more.
Your quotation will include details of the cover provided as this list of conditions covered and the precise definitions does vary from insurer to insurer.
Life Insurance with Tax Relief - How it Works
Before April 2006 it was possible for UK residents to obtain tax relief on life insurance premiums.You will sometimes see this product referred to as 'pension term' or 'life insurance with tax relief'.
We have set up a page dedicated to explaining how the tax relief works which you can access here.
Waiver of Premium
This option usually adds up to 5% to the cost of your plan. Should be be unable to work for longer than 6 months due to accident or illness, then the insurer will 'waive' your premiums i.e. maintain your life cover without you having to pay premiums for the remainder of your illness.
Indexation
The benefit selected on your plan increases each year to protect against the effects of inflation. The benefit usually increases each year in line with the Retail Prices Index (RPI) and the premiums you pay also increase - usually by approximately RPI x 1.4.
What are 'Guaranteed' and 'Reviewable' Premiums?
Guaranteed premiums remain the same throughout the term of the policy, unless you have chosen the indexation option.
Reviewable premiums are usually increased by the insurer at regular intervals. Premiums will remain the same for the first five years and then they are reviewed. This will then happen every five years. The benefit of selecting a 'reviewable' plan is that usually the premium starts off at a much lower level than a 'guaranteed' plan, particularly when critical illness has been selected as an option.
We can supply trust forms free of charge for new or existing policyholders. There is no cost for putting your life policy in trust but there are 2 major benefits:
> If you die, the proceeds of the plan are paid immediately to your beneficiaries. If the plan is not in trust, then your beneficiaries must wait for probate to be granted on your estate.
> Putting a plan in trust correctly will ensure the proceeds of the policy fall outside your estate, and are therefore not assessed for inheritance tax. If you do not do this, then up to 40% of your benefit could be lost to inheritance tax.
A trust will have 3 main parties:
The Settlor(s)
This is the policyholder, usually yourself.
The Trustee(s)
The trustees are the people who will administer the trust i.e. claim the money if you die and be responsible for ensuring the money is applied to the beneficiaries in accordance with your wishes.
The Beneficiaries
The people who will be entitled to the money if you die.
A trustee can be a beneficiary. Similarly a settlor can be a trustee. However when planning to save inheritance tax it is important that a settlor cannot also be a beneficiary. If in doubt please contact us for general guidance. For personalised or complex trust advice you should consult a legal adviser.
