Insurances

Life Insurance / Life Assurance
Life Insurance (also known as Life Assurance) will provide money for your dependents in the event of your death.
The way that life insurance works is relatively simple. The policyholder pays regular premiums, usually monthly, to an insurance provider. If the policyholder dies during the term of the life insurance policy then the insurance company will pay a previously agreed lump sum (known as the ‘sum assured’) to the policyholder’s dependents.

Types of Life Insurance Policy
Although many variants exist, most life insurance policies can be categorised either as level term assurance or decreasing term assurance.

Level Term Assurance
Level term assurance is the simplest form of life insurance. The cost of the regular premiums remains constant throughout the term of the policy as does the value of the sum assured. The length of the policy is fixed and the insurance company will only make a payout if the policyholder dies within the term of the policy.

Decreasing Term Assurance
Decreasing term assurance is usually cheaper than level term assurance. The premiums remain the same for the term of the policy but the sum assured decreases with time. This type of policy is often taken out in association with a repayment mortgage, where the amount owing on the mortgage decreases over time.

Who Needs Life Insurance?
If you have a spouse, partner, children or other dependents who depend on your financial wellbeing, taking out life insurance is a prudent option. Calculating the level of life insurance cover required very much depends on your personal circumstances, as the value of the sum assured is linked to the level of premiums. Ideally, the value of a life insurance policy should be sufficient to be able to repay any outstanding mortgage debt and other loans and also provide at least a partial buffer to offset the loss of household income, in the short term. In a two parent family it makes sense for both partners to have their own life insurance policies, even if one partner is the major breadwinner. A death in the family will have a major impact on the surviving members, both financially and emotionally.

For individuals without dependents, life insurance is unlikely to be a priority and other financial products would be more appropriate.

Life Insurance Trusts
As a result of the large rises in property prices in recent years, an increasing number of people potentially have become liable to pay inheritance tax on their death. For that reason, life insurance policyholders should consider setting up their policies in trust. The advantage of using the trust option is that the payout from life insurance will not then be included as part of the deceased person’s estate, so reducing the overall inheritance tax liability.

Life insurance is a sensible option for most families but, as always, when buying any form of insurance, it pays to shop around and read the small print carefully before making your choice.