Fiducia Wealth Management
Share this article

Personal protections or life insurance policies are something most will put off until they really feel they should take it out, and to put it bluntly – that’s normally too late and follows a recent health scare.

It’s somewhat understandable though given in today’s society, the concept of insurance has become shrouded with negativity. Most people feel forced into it – the legal requirement for car insurance, for example, or the need for home buildings & contents insurance for those with a mortgage.

When given the choice on what insurances to have and which ones to leave – well, where life insurance is concerned, people typically leave it.

Insurance at its inception was seen as a comfort blanket offered by companies for people to fall back on should something amiss occur, however, today some perceive it as a money-grabbing scam.

At Fiducia, we understand how the modern world sees insurance negatively, especially life insurance and we’re here to help you understand the benefits of life cover. We’re confident you’ll read this and will reach out to our advisers to discuss a policy that suits you and protects your loved ones.

What is life cover?

Everyone has financial commitments they are tied to, whether it be a mortgage, utility bills or providing for children. Should the inevitable occur early and someone passes away the impact stretches far beyond the emotional turmoil of grief felt by families and into the tangible reality of debt.

Without some sort of financial help, having someone who provides financially for the family pass away can quickly lead into a spiral of financial instability, leaving those already struggling with their loss in fear of losing their home and way of life.

Life cover is a financial comfort blanket that makes sure a person’s passing doesn’t mean destitution for their loved ones.

How does life insurance work?

At its core, life insurance policies are very simple: each month you pay the insurance company an agreed amount (the premium) and if you die, they pay a defined lump sum to your beneficiaries to give them the financial security they need.

What are the benefits of life cover?

Aside from the peace of mind you achieve that your family are not going to be left struggling financially when you die, there are several additional benefits that can form part of your life insurance plan, from pay-outs when you become ill and unable to work, to income protection that looks after you during periods of financial hardship. These are all separate products and picking the right one/one’s for you is key to achieving any peace of mind. This can be pivotal to your financial stability as an individual and as a family.

What type of life insurance do you need?

There are four main types of life insurance.

Whole of Life cover: This easy-to-understand policy type covers you for the rest of your life, paying out a set lump sum when you die. The premiums can be quite high, but the cover is comprehensive, and you need never worry about it ending.

Level Term Assurance (LTA): One of the main types of cover, LTA pays out a set lump sum if you die within the agreed term (for example, 20 years). Unlike Whole of Life cover, LTA does come to an end and is typically used to cover people through their working lives, or during the period where they are responsible for children.

Decreasing Term Assurance (DTA): Another common cover, DTA works in a very similar way to LTA however the final lump sum is usually tied to a mortgage or other long-term financial commitment. As the balance on the mortgage lessens, so does the assured sum on the insurance until the term comes to an end. Due to its decreasing nature, premiums for DTA cover are very affordable and offer an amazing deal for security regarding the family home.

Over 50’s cover: A dedicated deal for the more mature individual, over 50’s cover is a type of whole of life cover that does away with much of the medical questions and policy adjustments, giving people cover for funeral costs and other expenses without prejudice.

What does life insurance cover you for?

Standard life cover simply results in a lump sum payment given to your beneficiaries upon your passing, but variants do exist as separate products that can be standalone policies or be grouped together to form a wider life insurance plan. These include:

Critical illness cover (CIC): An addition to your main life insurance policy which provides a large financial pay out should you become seriously ill or injured and unable to work.

Income protection (IP): An insurance policy that provides a regular level of income if you become ill. Income protection can be used in addition to any sick pay scheme provided by your work, or the national statutory sick pay.

Family income benefit: Rather than receiving your life insurance pay out as a single sum, family income benefit is paid out over time, simulating your income over subsequent future years.

Investment linked whole of life cover: Linking your insurance policy with an investment scheme, these policies are extremely rare in today’s world, but they allow you to draw from your life insurance cover, effectively giving you a tied-in savings account with the potential for good returns on your investment. Due to the rarity of these policies, the investment content is usually minimal which can in lower the likelihood of ‘good returns’.

How is life insurance paid out?

A typical life insurance policy will be paid as a lump sum to the assigned beneficiaries in accordance with your Will or any Trust you have. upon your death, however, it is possible to place your policy in trust if the recipient is below a certain age or may require help properly using the money. To discuss trusts in greater detail and the tax efficiency they can provide, seek help from a financial adviser.

It is also possible to set your policy as a longer-term family income benefit, meaning it pays out monthly to your family rather than as a lump sum.

You should make sure any beneficiary is aware of your life cover so that they can contact the insurer to make the claim at the necessary time. It helps to speak to your beneficiaries, so they are aware of your estate wishes.

How long do you have to have life insurance before you die?

What does LI not cover?

For most cases, your life insurance will begin as soon as the policy is in place. Though it would be an extreme tragedy, and somewhat of a shock for all parties, a life insurance policy will usually pay out in full should death occur as a quickly as an hour after the policy being completed.

Death by suicide is the exception to this however, and any policy will state if it needs to have been in place for a complete year before it will pay out.

Additionally, some policies have an exemption for specific clauses stated in your application – for example, your cover may not be valid if you die doing an extreme sport such as base jumping if it has been marked as an exclusion in your policy.

Like any insurance application, it is important you are completely honest in your life insurance application. Over 97% of life insurance policies in the UK are paid out in full, and of the 3% that are rejected, most of those are due to a falsehood becoming evident from the time of application.

It is far better for your loved ones to have a valid life insurance policy that may cost a little bit more, than to have been paying premiums for years on a policy that will not pay out.

How much is life insurance?

Premiums are calculated based on your specific circumstances. Young people deemed healthy will find themselves paying significantly lower monthly direct debits than older people who smoke and are possibly overweight, for example.

Most life insurance policies have a premium that is set at the time of application. What this means is that the amount you pay per month won’t change even as you do (unless you cancel or redefine your policy). Getting life insurance while you are young can have has a massive benefit and may well secure you exceptionally low insurance payments for the period it is needed.

The main factors that affect the cost of your life insurance premiums are:

  • The type of cover (whole of life, level term etc.)
  • Your age
  • Your health
  • Your weight
  • Whether or not you are a smoker

According to data collected by MoneySupermarket between January 2021 and March 2021, when people are buying individual policies, they take out an average of £150,000 of cover. The average for joint life insurance was £200,000 during the same period.

The below figures taken from additional MoneySuperMarket data between June 2021 and August 2021 show the average costs based on a level term, life only (without critical illness cover) single person policy.

AgeAverage monthly cost
18-29£13.24
30-39£21.03
40-49£29.79
50-59£34.10

It’s important to note the cost really does depend on the level of cover you are looking for, the length of time the policy is required, as well as your own individual circumstances. To know what that should look like for you and your wealth, its’s best to speak to a financial adviser. A financial adviser will ensure you take out the right policy to meet your needs.

The latest stats:

How big is life insurance in the UK?

  • 7 million protection insurance policies in place in the UK – 1.5 million fewer than last year.

  • 442,000 collective life policies – in addition to the 23.7 million protection policies already in place.

  • 5 million new collective and individual life policies taken out in 2018.

  • 6 million members of group life insurance cover of some form in the UK in 2018 – 500,00 fewer than last year.

The number of households with mortgages to the costs of living:

  • 96m households in the UK have mortgages.

  • £131,724 average outstanding mortgage debt in November 2019.

  • £19,500 average price of household bills for a year.

  • £3,150 average food bill per house per year.

  • 42% of people with a mortgage have no life insurance in place.

  • £9,493 is the average cost of dying in 2020, 3.1% higher than in 2019.

Only 50% of households with mortgages have life insurance.

 

Why is life insurance important?

Providing for those who you leave behind can weigh heavily on the mind. Life cover really goes to the core of what insurance should be about – ensuring the well-being of those who are suffering from an unfortunate circumstance that couldn’t be foreseen.

Do you really want to leave your financial commitments to your family when you are gone? Life insurance provides the financial security that gives them the much-needed time to recover.

One of the strange facts where life insurance is concerned is this; people are only too happy to take out home insurance (ok they might be forced to by their mortgage company) but they’re hesitant to take out life insurance that can cover the cost of supporting the cost of owning house they live in.

At Fiducia, we believe in protecting and preserving our client’s wealth for them and for the benefit of their family. Life cover forms part of the wider financial plan. Taking out a life insurance policy written under an appropriate trust could be used towards paying any Inheritance Tax (IHT) liability. Under normal circumstances, the pay out from a life insurance policy will form part of your legal estate and may therefore be subject to IHT. By writing a life insurance policy in an appropriate trust, the proceeds from the policy can be paid directly to the beneficiaries rather than to your legal estate and will therefore not be taken into account when IHT is calculated. It also means payment to your beneficiaries will probably be quicker, as the money will not have to go through probate.

What’s your next step?

If you want to provide financial assurances for your family, minimising your estate’s IHT bill in the process, the sooner you speak to a financial adviser the more you can do. Our team of award-winning Chartered Financial Advisers are able to help you identify the best personal protection options for you and your family, call them for an initial telephone consultation on 01206 321 045.

 

Data sources:

https://www.moneysupermarket.com/life-insurance/

https://www.finder.com/uk/life-insurance-statistics