Life Insurance
What Is Life Insurance?
Life Insurance is an agreement or a contract between you and the Life Insurance company. You pay a regular monthly payment and in return should you pass away, the Insurance company agrees to pay a lump sum of money. This can also be paid out on a monthly basis through Family Income Benefit.
A Life Insurance policy is a legal agreement. This contract outlines the terms and conditions of the Life Insurance policy. This will include how much you need to pay each month, these payments are known as the premium. The contract will also set out what the Life Insurance company will pay out and when. The amount that is paid out is known as the sum assured.
In some situations, there may be restrictions or exclusions put on a policy and it’s important to get advice and understand how and if these conditions may affect you before entering into such an agreement with a Life Insurance company.
Why do people buy Life Insurance?
There are many reasons why taking out Life Insurance is a good idea. They all centre around paying known debts or protecting those important to you. Here are some more common examples:
Step #1 : Establish
Initially, we want to focus on you. Your situation, your needs, and your current understanding of how we can help. At this first stage, we are looking to discover whether or not you would benefit from our services, whether or not we can meet your needs, and if we feel we’re a good fit, then we can discuss what our remit will be and how we can work together.
The first meeting is an opportunity for us to explain how we work and what we would charge. A meeting in no way equates to an obligation on your part to take things any further, if you feel we’re not right for you.
1. Providing Financial Security for Family
A primary motivation for purchasing Life Insurance is to provide financial protection for loved ones. In the event of the policy holder’s unexpected death, the sum assured or ‘death benefit’ can be used in any number of ways to ensure their family left behind have adequate financial resources to cope and carry on without having to make difficult decisions or sacrifice. Life Insurance is a crucial safety net that can help a grieving family maintain their quality of life.
2. Paying Off Debts
Many people have outstanding debts, such as mortgages, car loans, or credit card balances. The consequences of a family member passing away is an awful experience, but Life Insurance can make sure it’s not made worse by protecting those left behind financially. This financial lifeline can ensure that these debts are paid off, reducing the stress that comes with them.
3. Estate Planning
Life Insurance plays a vital role in estate planning. Life Insurance is very flexible and work alongside and complement any number of estate planning options. Life Insurance can help towards paying a certain or potential future inheritance tax liabilities. This can be helpful when specific or unique assets want to be passed to beneficiaries and can’t be sold.
4. Protecting Business Interests
Entrepreneurs and business owners often purchase Life Insurance to protect their companies. It can serve as a financial cushion to keep the business afloat if a key individual, such as a founder or key employee, passes away unexpectedly. This ensures business continuity and provides funds for potential buy-sell agreements among business partners.
5. Legacy Planning
Some individuals use Life Insurance as a tool for creating a legacy. Should their lives be cut short they want to be able to provide. This could be to a charity or organisation supporting a cause close to them. Often, Life Insurance can be used to make sure children have the funds they need for education, or to help towards a deposit for the first home.
People buy Life Insurance for peace of mind in case the worst happens. This is why it’s important to have the difficult conversations about what would happen in the unexpected event of your death. These conversations help us advise on the right policies for you.
What are the different types of Life Insurance?
Life Insurance can come in many forms, when considering specifically ‘term’ Insurance which is having a policy for a fixed term there are any number of combinations of policies that can be put together. These terms can be as little as 1 year to any length, usually up to an age of about 80 but there are expectations that go beyond this.
Level Term Insurance. This is a policy with a fixed sum assured or payout amount. For the life of the policy, if triggered it will pay out this set amount. These amounts tend to be round numbers, but don’t have to be. They can be as little as £5,000 to many millions.
Increasing term Insurance is similar but the payout due rises over time. An increasing sum assured is very helpful if you want to protect against inflation or if you know the liabilities is likely to rise over time, for example an inheritance tax bill. The rate of increase is usually set between 1-10% or can be fixed to a measure of inflation. In this situation the monthly payments can be either fixed or can rise each year in line with the increased pay out.
Decreasing Term Insurance. For debts or other shortfalls that are likely to fall over time a popular Life Insurance policy is decreasing term Insurance. With this type of policy, the sum assured payout falls over time this helps reduce cost and works well with mortgages and other debts that are being paid off. This can also be very helpful for people who know their goals and what they are working towards this is because each year that someone works and saves towards this goal the requirement for Insurance is less. A decreasing sum assured can be very helpful for working alongside a savings goal be it retirement or university costs for children.
What common mistakes are made when people get Life Insurance?
Life Insurance can be complicated, and we now know there can be several factors to consider. It is also one of the most important contracts you will enter and the impact of getting things wrong can be severe. Here are a few common pitfalls that we see when reviewing people’s policies:
Step #1 : Establish
Initially, we want to focus on you. Your situation, your needs, and your current understanding of how we can help. At this first stage, we are looking to discover whether or not you would benefit from our services, whether or not we can meet your needs, and if we feel we’re a good fit, then we can discuss what our remit will be and how we can work together.
The first meeting is an opportunity for us to explain how we work and what we would charge. A meeting in no way equates to an obligation on your part to take things any further, if you feel we’re not right for you.
Waiver of Premium
This is an added feature that can be easily overlooked. When waiver of premium is added for a minimal extra cost, the policy holder does not have to continue payments if they fall ill and can’t work. This protects the policy and the payments made so far until at the most difficult times.
Trust
Often the whole point of Life Insurance to make sure fast access, or control to funds in the event of death is possible. Writing a policy into trust makes this possible but is often forgotten at the end of the application process. This can lead to funds having to go through probate, taking many months, or not being distributed as the policy holder would have wished. For some it significantly increases their estate and their inheritance tax liability.
Terminal Illness
A common option is for payout to happen when a condition has been diagnosed as terminal to enable the policy holder to see the benefit of their plan. However too many times this box is left unticked.
Inadvertently Not Supplying Information
When applying directly it’s easy for questions to be misunderstood or not answered in enough details. This can lead to nonpayment if the insurer contests the claim and find post death information wasn’t offered. Working with an adviser helps you answer correctly so you don’t mistakenly invalidate your insurance.
Being Underinsured
We often don’t fully factor the amount of Insurance we need. Thinking about the size of a mortgage is one thing, considering early repayment fees, moving fees, changes in interest rates, inflation and a whole host of other factors can lead to policies not fit for peoples needs.
Assuming Critical Illness Cover Is Included
Many people have life insurance and assume it includes critical illness cover. They’ve made the good decision to take out insurance, but haven’t fully understood what it does and doesn’t cover. Life Insurance and Critical Illness are different.
Learn more about Critical Illness.
People buy Life Insurance for peace of mind in case the worst happens. This is why it’s important to have the difficult conversations about what would happen in the unexpected event of your death. These conversations help us advise on the right policies for you.