When insurance cover can be a life-affirming experience
If you are buying life insurance, it is best to tailor it to such factors as life expectancy, job and family
Friday 06 April 2001
Buying life insurance can often be a straightforward decision. If you have a spouse or children, or anybody who would suffer financially if you were to die, then you should buy cover. If you have a joint financial commitment, whether buying a house or setting up a business, and they could not shoulder the burden alone, cover is essential.
Life insurance offers a double benefit financial protection for those close to you if you die, peace of mind if you don't. There are two main types term assurance and whole-of-life cover. Term assurance is the more popular, accounting for around nine out of 10 policies. It is one of those rare things, a product that is actually falling in price. Competition between insurance companies and increasing life expectancy has forced premiums down in the last five years.
With term assurance you pay monthly premiums for a set period, say 25 years, and your dependants receive a payout, usually a lump sum, if you die during the policy's span. Die after the term has expired, and there is no payout. If you stop paying premiums the policy stops. It has no cash-in value at any stage.
By contrast whole-of-life cover lasts for as long as you do. It includes an investment element, and therefore pays a lump sum to your dependants whenever you die.
Term assurance is the simpler product, and although it is offered by dozens of companies from Direct Line to CGU Life to Marks & Spencer, there is little to choose between policies. All most people need to do is find the cheapest policy from a reputable insurance company. The price can be very low indeed. A man aged 35 buying £100,000 life cover over a 25-year term would pay £13.95 a month with insurer Standard Life. A woman aged 35 would pay around £11.02 with the same insurer. Cover inevitably gets more expensive as you get older and the likelihood you will die increases.
A 50-year-old man wanting £100,000 cover over a 15-year term would pay £36.72. At this age a woman would pay much less, £23.95.
Women typically live longer than men, which is why they pay less, but the life expectancy gap is narrowing, says Dale Tranter, protection researcher with Countrywide Independent Advisers. "Many women drink and smoke as much as men. Men also perform fewer hazardous jobs, and are less likely to die early from factory work or diseases such as asbestosis."
There are several types of term assurance. With level-term assurance your monthly premiums are fixed for the life of the policy, as is the amount of cover you have bought (or sum assured). With increasing term assurance, the sum assured increases each year, and your premiums may also increase. A third type called decreasing term is usually taken out to cover a mortgage. This keeps premiums to a minimum, because the sum assured falls each year as the amount outstanding on your mortgage falls.
All three types of policy pay a lump sum on the death of the person assured. But Julian Crooks, principal at the Financial Planning Service in Sheffield, recommends another type of life cover that is often forgotten, family income benefit. Instead of paying a lump sum, it pays your dependants an annual income for the remainder of the policy term. "This is a fantastic policy, it is cheap and does the job. Rather than paying, say, a £200,000 lump sum, it will pay an income of £10,000 a year for 20 years. It is cheaper because if you die, say, 10 years into the term, the policy only has to pay £10,000 annually for 10 years, just £100,000 in total. Scottish Provident and Swiss Life offer good policies," he says.
Whichever type of term assurance you choose, Mr Crooks says you should avoid landing your loved ones with an inheritance tax bill. You can do this by writing the policy in trust, for which you may need help from a financial adviser or solicitor.
If you fail to write your life policy in trust, the payout may be added to your estate, and the whole lot hit with an inheritance tax bill. Your estate will be taxed at 40 per cent on all assets, including your house, worth more than £242,000.
Crooks says family income benefit has tax planning advantages. Provided the policy is written in trust, the income paid each year should be tax-free. Although a lump sum life insurance payout will also be free of tax if written in trust, once that money is invested to provide an income, your dependants will pay tax on the interest they earn from those investments in.
A consideration when buying life insurance is the amount of cover your dependants will need. A sum such as £100,000 may sound a small fortune, but is it enough to see your loved ones through to the next 10, 15 or 20 years?
People often cover four times their annual salary as a benchmark, but many financial advisers say you should consider covering up to 10 or 12 times salary.
As a relatively straightforward product, term assurance can now be bought online. Website Moneyextra offers a search facility that allows you to compare deals from a range of different providers. A search for a 35-year-old man wanting £100,000 cover over a 20-year term produced a best buy from Tesco Personal Finance costing £9.74 per month, while for a woman of the same profile the cost was £7.70 from Barclays Life.
A number of insurance brokers offer life cover online, including Ins-site and Term-Assurance Online, while Direct Line and CGU Life sell their own policies online.
Not everybody should buy life insurance. If you are single and have no dependants, there is no point in buying life cover, says Diane Saunders, a financial adviser based in Leeds. She says an alternative form of insurance, called critical illness cover, offers far more useful protection to single people. This pays a tax-free cash lump sum if you are diagnosed with a serious illness such as heart disease, cancer or stroke, and is invaluable for those who have no relatives to look after them in times of sickness.
Those with dependants can combine life insurance with critical illness cover, says Saunders. A man aged 35 would pay around £12 a month for £100,000 annual life cover with Legal & General, and around £28 if he added critical illness cover. The policy would pay out once, either on diagnosis of a critical illness or on death. A woman the same age would pay around £22 a month.
Barclays, www.life.barclays.co.uk; Ins-site, www.ins-site.co.uk; CGU Life, www.cgulife.co.uk; Direct Line, www.directline.com; Legal and General, www.landg.co.uk; Moneyextra, www.moneyextra.co.uk; Term-Assurance Online, www.termassuranceonline.co.uk; Tesco, www.tesco.com
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