Life Cover Issues to Consider

For how long do you want to be covered?

It is possible to buy policies that will cover you for as short a time as an aeroplane flight to as long as your entire life, however long that may be. The longer you want the cover to last, the more likely you are to die within that period, and hence the higher the cost. It is therefore important to consider the purpose of the protection and ensure the policy covers you throughout the time when your dependants would need it.

How much life cover do you require?

You might require a lump sum to pay off the mortgage, as well as replacement income, which could be provided either by income-paying life insurance (known as family income benefit) or by insurance which pays out a lump sum which you could invest to produce the required income. You need to consider clearing all outstanding debts, loans and credit cards as well as covering funeral expenses.

Who should be covered?

Although it is obvious to most people that the “breadwinner” of the family should have life assurance, it is often just as important that spouses should be covered as well. This can be achieved either using separate policies or a joint policy. A 'first death' policy covers both your lives and pays out once on the death of the first of you to die. A 'last survivor' policy pays out once on the death of the second of you to die. For protecting dependants, the 'first death' option is usually the more appropriate. A joint life policy will be suitable only if you both need to insure for the same amount. For example, a joint life policy may be ideal for paying off a mortgage in the event of one of you dying, but less suitable as a means of replacing lost income since the income needs will vary depending on which of you has died.

How do you want the proceeds paid?

Proceeds of a life policy can either be paid out as a single lump sum or as an income. However, the decision as to which type is appropriate has to be made at outset.

What quality of life assurance do you want?

The types of policy available vary considerably in both price and effectiveness. As with most things in life, in general, the more you are able to pay the better the quality of the protection. Options that enhance the effectiveness of the protection, but will increase the cost are:

• Inflation protection
• Waiver of premium
• Guaranteed rates
• Convertible option
• Renewable option
• Terminal illness
• Pre-paid in the case of permanent disability
• Pre-paid in the case of diagnosis of a critical illness
• Whole of life cover

Writing Life Insurance In Trust

If the proceeds of a life policy are paid to your estate on death, there can be a long delay before the money becomes available to your dependants and there could be inheritance tax to pay on the proceeds. Writing an insurance policy in trust avoids these problems by ensuring that the policy pays out direct to your dependants, bypassing your estate altogether.

Most insurance companies give you the option of writing a policy in trust at no extra charge and have standard forms for doing this.

Life-of-Another Policies

An alternative is a policy that pays out direct to someone else if you die. For example, if you want to ensure that your husband or wife, or unmarried partner is financially secure if you were to die, you should consider one of these options:

Own-life policy : You take out life insurance to pay out on your own death. To prevent the payout forming part of your estate and to avoid delays, you write the policy in trust for the benefit of your spouse or partner.

Life-of-another policy : Your husband, wife or partner takes out life insurance based on your life. If you die, the policy pays out direct to him or her, so there is no need to write the policy in trust.

With all types of life insurance, at the time the policy is taken out you must have an insurable interest in the life of the person covered. This means that you must stand to lose financially if he or she were to die. You are assumed automatically to have an unlimited insurable interest in your own life and in that of your husband or wife. When it comes to other people, your insurable interest is limited to the amount that you would lose if they died. Therefore, a life-of-another policy cannot be taken out on someone with whom you have no financial connection.

The main disadvantage of a life-of-another policy is if your relationship breaks down: your former spouse or partner owns the policy and has the absolute right to the proceeds if you were to die.

You may need to take out your own policy to ensure that any children would be financially provided for. On the other hand, where a relationship has already broken down, a life-of-another policy taken out by a parent, with care of the children on the life of the absent parent, can be useful as a way of protecting the family against the loss of maintenance payments in the event of the absent parent dying.

Waiver of Premium

Both term insurance and whole-of-life policies may include 'waiver of premium'. This lets you suspend your premiums for a certain period in specified circumstances: for example if you are unable to work because of illness. You need to check the policy wording carefully to see precisely what conditions apply. Not all policies offer the waiver. With those that do, the waiver is sometimes automatically included and sometimes an optional extra. Typically, it could increase your premiums by around 6%.

Waiver of premium is a relatively cheap and straightforward way of making sure that your life cover would continue even if your finances were temporarily strained.

Replacing existing policies

If you are considering replacing an existing policy, we strongly recommend that you continue paying premiums on any existing policy until you are informed in writing by the new insurance company that they have taken on the risk of your new life cover policy. In addition, it is essential to be aware of all of the required benefits under your existing policy (including whether it is written in trust) so that you can include them in the new policy.

Indexation

Level cover:

under this plan the sum assured remains the same for the duration of the contract.

Increasing cover:

indexing your sum assured allows you to maintain the real value of your life assurance protection as it increases automatically each year, regardless of your state of health at that time. Your contribution will increase each year to reflect the increased sum assured. If the sum assured is increasing by 5% the premium will increase by more than 5% to cover not only the increase in benefit but also the fact that you are one year older.

Decreasing cover:

under this plan the sum assured is specified at the outset of the contract and decreases throughout its term.

Renewable cover

The sum assured remains the same for the duration of the contract. For a higher premium you acquire the option of extending the original term of the policy, without having to provide medical evidence.