Arranging the right type of protection insurance can seem like a bit of a maze. If this is the first time you have considered it then hopefully you will find this a useful aid and it will point you in the right direction.

When considering arranging protection insurance it’s important to take into account your circumstances and what situations could leave you or your family in a vulnerable financial position.

Do I need a Whole of Life policy?

Many of our clients simply want to arrange a life insurance policy which will pay out enough to leave a small lump sum for their family and to cover their funeral and related costs.

If this is the case, they need to be considering a Whole of Life policy. This policy is guaranteed to pay out when the policyholder passes away, providing that the premiums are maintained until that time. There is no investment value so if the premiums are not maintained, the policy will lapse.

Whole of life policies are also used to help people to mitigate a potential inheritance tax liability.* For example if your estate’s net value was £600,000 and you are single, the tax liability would be £110,000 (£600,000 – £325,000 x 40% = £110,000). A simple Whole of Life policy with a sum assured of £110,000, written in trust,** could cover the tax bill, and mean that the beneficiaries of your estate may not be liable for any inheritance tax.

It is also possible to set up a joint Whole of Life, second death policy. This type of policy is suitable for people looking to mitigate some or all of their potential IHT liability. This means that two policyholders are covered (usually a husband and wife/civil partners) but the policy pays out when the second policyholder passes away.

Do I need a Life Insurance policy over a fixed term?

The alternative to a Whole of Life policy is a ‘term policy’. This type of policy has a fixed end date e.g the policy will provide cover until the person reaches the age of 90. The downside of this type of policy, particularly if it’s there to cover funeral costs, is if the policy holder lives beyond the end date of the policy. The upside compared to a Whole of Life policy is it usually much cheaper.

Term policies are suitable if someone needs cover for a specific period of time, e.g until a loan or other debt has been repaid.

*The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

**Trusts are not regulated by the Financial Conduct Authority.

Case studies

  • Case study 1

    Mr X, a 65 year old gentleman requires a life insurance policy which will pay out a sum assured of £110,000 whenever he passes away, to ensure funds are available to cover the potential IHT liability. A Whole of Life policy, with a sum assured of £110,000 would cost £234.67 a month. The policy must be written in trust to ensure that the proceeds do not form part of the estate.

    Quotes correct as of Dec 2018. Please note that the premiums provided are indicative only and based on this specific example, which is shown for information purposes only. Your own circumstances will determine whether the amount payable is more or less than the figure quoted.

  • Case study 2

    Mr X, a 65 year old gentleman and his 60 year old wife require a life insurance policy which will pay out a sum assured of £110,000. This is the amount that they have calculated as being the potential IHT liability, taking into account the transfer of tax allowance. A joint Whole of Life, second death policy with a sum assured of £110,000 would cost £158.53 a month. The policy must be written in trust to ensure that the proceeds do not form part of the estate.

    Quotes correct as of Dec 2018. Please note that the premiums provided are indicative only and based on this specific example, which is shown for information purposes only. Your own circumstances will determine whether the amount payable is more or less than the figure quoted.

  • Case study 3

    Mr X, a 65 year old gentleman requires a life insurance policy which will pay out a sum assured of £50,000 to his wife when he passes away. He’s looked into a Whole of Life policy, however the premium quoted was £112.44 which is outside his budget. A term policy offering him cover until his 90th birthday would cost £59.28 a month. Although there is no guarantee this policy will pay out (as he might outlive the policy) it is much more affordable.

    Quotes correct as of Dec 2018. Please note that the premiums provided are indicative only and based on this specific example, which is shown for information purposes only. Your own circumstances will determine whether the amount payable is more or less than the figure quoted.

Q: I don’t have any children, do I need insurance?

A: Ask yourself, what would be the financial impact on your partner if you passed away? It may well be that you don’t need any life insurance, particularly if you have a good level of savings which would sustain your partner if you passed away.

Q: Would it be a good idea to index link my policy?

A: In most cases the answer is yes, especially if it is a long term policy, and is designed to protect your family or to cover your income. An index linked option helps protect the benefits against the effects of inflation. Each year you would receive a letter from the insurance company letting you know what the new premium and benefit is for the forthcoming year (most of these policies increase by RPI/or a set percentage such as 5% per annum). If at any stage, you would like to opt out of the indexation option, all you need to do is contact the insurer who will then freeze your premiums at their current level.

Q: What is terminal illness cover?

A: Terminal illness cover is included within most life insurance policies. The life policy will pay out if someone is diagnosed with a terminal illness during the term of the policy (a few insurers would decline a terminal illness claim if it was made during the last 12 months of the policy). An Insurer’s definition of a terminal illness is that someone has been told they have less than 12 months to live.

Q: Will my health affect the cost of the cover?

A: If you decide to take out a policy, you will be asked a series of health questions, as well as lifestyle questions and family history questions. If you say yes to some of these questions, and your health condition is assessed as an additional risk by the insurer, the premium you are offered (once the underwriting has been completed) may be ‘loaded’. This means the premium you were originally quoted could be loaded by 50%, 75%, 100% + and in a worse case scenario your application could even be declined.

A word to the wise…..

If you are suffering from or have suffered from a health condition which you think could affect a life insurance application, you would probably be better off speaking with a specialist adviser who will complete some research before recommending which insurer to apply to. Not all insurers will assess a medical condition in the same way.

Would you like some advice?

Contact one of our team now to get impartial & helpful advice

Call 0800 644 4468Mobiles call01737 336 990