Life Insurance Should Be Simple

Life insurance should be fairly straightforward, paying out a specific amount when you die. It is not health-related, and it pays out on a single criterion: whether you're dead or alive. Although that should mean that policies are broadly similar, there are actually three types of life insurance you can buy.

Level term assurance is taken out for a specific length of time (the term), with the lump sum that would pay out in the period being the same whenever you die - within the term.

In decreasing term assurance the amount the insurance pays decreases over the term. It is usually bought in connection with a repayment mortgage where the amount the insured wants to be covered for gradually decreases over time. This usually makes this insurance type cheaper than level term assurance.

Whole-of-life insurance pays out whenever you die and the amount is guaranteed. Premiums can alter for this type of mortgage. Part of your premium is invested and it is hoped that the investment will grow to keep premiums low. These premiums have increased sharply from time to time. It is best to tie it in with your inheritance tax planning and to consult a financial adviser before buying one.

The amount you are insured for depends on what you want the insurance pay-out to achieve. Is it just to pay off the mortgage, or should it provide a good standard of living for your dependents? Will these costs reduce over time? For example, when the mortgage gets paid off, or the children leave home. Other considerations may be your funeral expenses, other insurance policies, or employee benefits.

Mortgage term assurance covers the value of your mortgage, but nothing else, so if you have this, there is no point in buying life assurance to cover the mortgage again.

There are ways to improve the value of your life assurance. For example, couples are often offered joint life insurance policies, which will pay out the same amount if either partner dies. The price of a joint policy is usually cheaper than two single policies.

Another important thing to consider when buying life cover is to write it 'in trust'. This means that the proceeds from the life insurance policy would not be part of an individual's estate upon death, and would therefore not be part of the calculation for inheritance tax.

Life insurance premiums are calculated by using information about your health, age, occupation and lifestyle. It is easy to see that a stunt man with a 50-a-day smoking habit would pay more than a vegan librarian. Most people would not be willing to change their occupation to get cheaper life insurance, but many are willing to try losing weight or give up smoking. You must have given up smoking at least one year earlier to be classed as a non-smoker but doing so can knock pounds off your monthly premiums.

You can buy life insurance direct from insurers, finding them in Yellow Pages or on the Internet, and these days you can even buy life insurance from a supermarket.

Buying from an adviser can be beneficial as they should give you an explanation of the process of writing the policy in trust and ensure you get two single life policies, or one joint policy, when it is appropriate.

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Published on January 29, 2008