Insurance Guides and Resources

This guide was put together by our industry experts and will provide you with everything you need to know about life insurance.

Ever wondered about life insurance for your ex-spouse?

Want to know the cheapest way to get critical illness cover?

Interested in avoiding inheritance tax with a life insurance trust?

Learn the difference between level and decreasing terms and impress everyone with your indexation knowledge.

This complete guide will provide you with everything you need to know and will also explain income protection as a suppliment to some life insurance policies.

From children to extreme sports – we’ve got you covered.

Without further ado, let’s get started on the ULTIMATE GUIDE to life insurance!

Contents

Investing your life: what’s the risk?

The big question for any insurance, especially life insurance is this – is it worth it?

With life insurance you won’t be the one reaping the rewards (unless you know how using this guide) it will be your family, the beneficiaries, who will see the return.

Therefore life insurance isn’t an investment of your life but an investment into the financial well-being of your loved ones.

In order to find out if buying life insurance is a good use of your money, we need to take a look at the risk.

Life insurance is primarily an agreement between yourself and the insurer. You pay monthly premiums and, in the event of your death, the insurer will pay a large sum of money to your estate or your beneficiaries. This agreement is based on risk and insurers are incredibly good at calculating that risk.

The risk is based on how long you live and ultimately how many monthly premiums you will pay to the insurer. That risk is low if you are likely to live a long life, making you a good investment.

But what about the other way around? Well, the bottom line is that life insurance shouldn’t really be considered an investment. The risk for you, is in dying and leaving a large financial burden to your spouse and family, therefore life insurance should be thought of more as a “financial you”.

This “financial you” would be there as a silent body guard, ready to step in for your family’s protection should you die and pass on your debt.

But, there are some clever ways you can potentially make money off your life insurance policy. Read on to find out how!

 

All you’ll ever need: how much cover and how long

How much cover is too much cover? Well it kind of depends on what you need and what type of cover you want to take out.

The best way to determine how much cover you need is to take a look at all your outstanding debt. The larger that sum, the greater the amount you will need your insurance to cover. This re-payment amount is the financial protection you will be offering your beneficiaries in the event of your death. It is worth considering how much they will need in the future, beyond mere debt repayment,  if you were not around to help pay for it. A classic example of this is university fees for your children, would they be able to afford to tuition without your financial support?

How long you need cover for depends on this factor of further financial support. If you calculate your current re-payments for personal loans, mortgages and credit cards and find that they will be repaid in 20 years (assuming there is no further debt) then you may only wish to pay for cover for 20 years.

However, you may wish to increase your cover so that you are able to leave a sum of money to your beneficiaries. Money that they could use for university or a deposit on a house for example.

This all translates once again into risk, and ultimately it is up to you to decide what level of financial risk you are willing to take. There are many people who ignore the issue of risk completely and are unconcerned about paying more in premiums than what will be paid out to their loved ones.  For them it is more important that their family will always be protected from financial hardship.

If you are young and healthy then getting life insurance sooner than later will help with this financial bargaining between premiums and pay-outs. Monthly payments to the insurer (premiums) will be significantly lower when you are young and healthy and can offset the cost of life insurance against the sum paid out in the event of your death.

Honesty gets you the best policy

On average, insurers pay out on over 98% of claims for life insurance.

The graph shows just a selction of the major life insurance providers and their payout rates and as you can see – they are extremely high.

In the rare circumstance that an insurance provider won’t payout on a Life Insurance policy there will be some sort of enquirey. What it ususally falls down to are descrepancies on the policy application. Most notably, people who say they don’t smoke when they do.

Even if you only smoke ocassionaly, say when you’ve had a drink perhaps, an insurance company will still consider you a smoker. This is incredibly important because if it’s not on your application that you are a smoker, the insurance company has the right to contest or even refute your claim.

Honesty really does get you the best policy where life insurance is concerened and there are numerous examples where it has. If you are nervous to disclose certain aspects of your life style because you think you will be penalised on your premiums or be refused life insurance – don’t be. During the winter Olympics we wrote a blog about insuring olympic athlete and gold medal wining skeleton bob sledder; Lizzy Yarnold. She hurtles head first at 80 mph on little more than a tea tray and her premiums would only be around £31 per month.

Overview of cover: your life insurance finger print

Everyone is different and everyone leads a unique life, which is why life insurance isn’t an umbrella policy where one size fits all. There are many different policy types that will be covered in this guide, but alongside the differing policy types there are also subtle differences according to the person covered.  

These difference are based on you and your requirements and become the unique ‘fingerprint’ insurance policy to cover you and your family.

There can be many different factors for you to consider when choosing the type of insurance you will need and the specifications of the policy types. An insurance expert like one of the Quick Quote Life advisors will be able to tailor all the specifications to suit your needs and match your life style. But for a general overview of the policies, here are the main policy types to consider;

Decreasing term -This is a life insurance policy that is determined by your remaining mortgage repayments. Essentially the cost of your premiums decreases over time as the pay-out in the event of your death also decreases with your diminishing mortgage repayments. – The less you have to pay on your mortgage, the less you have to pay in premiums. This type of life insurance cover is a great affordable option for anyone with a long mortgage and people financially dependent on them to pay it.

Level term – this assures a set sum of money to be paid out in the event of your death for a set amount of time (hence the level term). The premiums are often higher but the amount paid out never decreases. This type of insurance would likely suit someone who has no mortgage or just has an interest only mortgage and was looking to leave a lump sum to their loved ones.

Whole of life - covers you for the whole of your life and pays out to cover costs in the event of your death, namely; funeral costs or the sum you have insured. Because there is no fixed end to the policy cover term, and the insurance company will have to eventually pay out, the premiums can be more expensive than other types of insurance covers.

Critical illness cover – this type of insurance is designed to cover you if you should develop an illness that is deemed critical and leaves you unable to work and financially provide for your dependants or yourself for that matter. Every insurance company differs on the list of medical illnesses defined as critical. Speak to our advisors to find out more.

Over 50’s – being young and healthy is certainly a privilege and life insurance is no exception with lowered premiums for those in better health and with more years ahead of them. Over 50’s plans are designed for people who are over fifty years of age and may have some pre-existing medical conditions. The cover does not require a medical exam and is not subject to medical history. The type of insurance you can expect would be tied to a significant lump sum pay-out in the event of your death. Premiums are usually paid until 90 years of age, and if you live beyond that your policy will still be active but you won’t have to pay any more premiums.

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Indexation

This is the bit that sounds super confusing but really it’s very simple. It just means your premiums will increase with inflation (if you want them to)

This may seem bad (rising premiums) but really it makes a lot of sense. The Retail Price Index (RPI) is a list of everything consumers buy (from a loaf of bread to electricity) and the value of these items typically rises each year. Dare I mention the cost of a Freddo frog these days? The value of these items increases and therefore so does their cost. It’s exactly the same with life insurance.

The value of the lump sum of money you want to be paid out in the event of your death will not be the same in twenty or forty years from now. If you want to leave £300,000 to your loved ones when you die then that (almost definitely) will not hold the same value in a couple of decades. £300,000 in the future might not even be enough for a house (yikes).

But there is a clever and simple solution to this little problem of the changing value of money and that is to link your life insurance premiums to the RPI and index your monthly payments. Sure, they are very likely to go up (but only by a couple of pounds) but then so will the lump sum insured go up. By the time the insurance company pay-out to your loved ones or your estate, the amount could have increased by thousands. You can opt out of indexation any time you like and your premiums and your life insurance lump sum pay-out will remain locked at that value.

Life Insurance for Health Problems

Life Insurance is designed for people who are healthy and not a risk to insure, but this means many millions of people with health problems miss out on the opportunity to have cover on their life. Lately though that has started to change.

If you have health problems such as a high BMI or type 2 diabetes then there are Life Cover options available.

Manage Life policy by The Exeter insurers offer a life cover that specifically targets people who are typically hard to insure. Their policy allows you to update your health statistics such as weight loss or better management of your diabetes that could then reduce the cost of your premiums. If you have do not have a managed condition then the premiums will be set at the time the cover is taken out.

There two types of cover you can choose from with Manage Life: level term and decreasing term. The policy includes many benefits for both terms including – accidental death benefit, mortgage free cover benefit, variable premiums. If you would like more information on Managed Life then give Quick Quote a call or speak to The Exeter directly.

Joint and single cover policies

According to data from money super market, 51% of people have a single policy cover and 49% of people have joint cover.

A single policy covers just one person, the policy holder, and pays out a sum in the event of their death. Some people in a relationship choose to have two separate single cover policies.

A joint policy covers two people in one policy and either pays out on the ‘first death basis’ where upon the cover pays out when the first person in the policy dies, or the ‘second death basis’ in which the policy pays out once both policy holders have died.

A joint policy will only pay out on the cover once, whereas a single policy for both people will pay out in each circumstance.

If you are in a relationship with a mortgage, no children and you are on a budget then a joint policy might work better for you on a first death basis. Joint policies are typically cheaper and can be paid by both parties making missed payments on you cover less likely.

However, a single policy might suit you better if you want sole responsibility of paying your premiums or if you want cover to pay out twice, once for your partner and once for you (especially if you have children or dependants).

It would be more expensive to have two single cover policies but it would give you more independence and of course two pay outs. Having a single cover policy would also be cheaper in the long run – if your partner dies later in life and the joint policy pays out, you would be left without life insurance. Trying to find cover later in life would be significantly more expensive than if you had taken it out when you were young.

The other thing to consider with joint cover is the potential for the relationship to breakdown. In this instance an insurer may not be able to split the cover and one of you might refuse to pay their contribution. This would mean you would have to take on the full premium amount or end the cover entirely and look for a new one (by which point you could be a lot older and premiums would be significantly higher).

Income protection insurance

This may seem a strange life insurance product considering it doesn’t have much to do with the cessation of your life but it is a great type of cover to have, especially if you are self-employed. Similar to critical illness cover, if you should become too sick to work then the insurance will cover you financially whilst you recover.

There are a couple of differences to consider with income protection insurance however, namely that although it sounds like sick pay, it isn’t. Statutory Sick Pay (SSP) pays for a total of 28 weeks upon which you have to return to work or remain off with no pay at all.

Secondly, your employer might have a sick pay addition as part of your contract but these usually incorporate government sick pay like SSP and will only typically last for a maximum of six months. After six months you might be offered three months of half pay. The graph below shows how long you would receive wages for using SSP and a work based sick pay scheme.

As you can see, you would be left with just half pay after July and from the end of September you would get nothing from either scheme. The graph is based on an annual income of £20,000

It’s not ideal for long term absences from work and puts a time limit on your recovery period. Income protection insurance is a type of cover that will pay 65% of your monthly wage for however long you need it to.

It is capped at 65% for two reasons; one, because Income Protection Insurance monthly pay-outs are not taxed therefore you would be receiving more than your monthly wage if it was higher than 65% - we know that sounds great but legally it’s not accepted as there still needs to be an incentive for you to return to work. Secondly, because you can still receive SSP in addition to your Income Protection.

Now you can see that with Income Protection you will be in receipt of your full monthly wage up until July, where upon your SSP will run out – but your Income Protection will keep covering you at 65% of your monthly pay. As the SSP is received in addition to your Income Protection, you might even receive more than your normal wage for the first 28 weeks.

If you wanted to use your work’s sick pay scheme then your Income Protection would make up the difference until your work based sick pay ran out and then pay you the full 65% as shown in the graph below.

There are further benefits to Income Protection that include deferment times on when you want your cover to start. Deferring your cover start date also reduces your premiums, so in the example of the graph above, if you received work sick pay you could set your cover to start after the first six months and reduce your premiums whilst all the time receiving a monthly income.

Once you return to work the policy will stop paying out and you will start paying your premiums again as normal. You can claim on your policy again in just six months, or if you are sick again in relation to the first incident then you can re-open the first policy cover term.

Finally, many insurance companies understand that roles in hospitality or sales rely on bonuses and service tips and these can be taken into account when determining your monthly pay out on your cover.

Of all the life insurance products out there – Income Protection makes total sense in all instances.

Read our resource page if you want more information on the difference between life insurance and income protection insurance

Premiums

If you have been reading this guide the whole way through then you may be wondering at this point what the cost of premiums are and how they work.

Premiums are paid to the insurance company either monthly or annually and essentially pay for your cover. In return you work out how much money you would like to receive in the event of illness, or your family is to receive in the event of your death.

It is important that you pay these premiums in full and on time or you may not be covered for the month you did not pay.

The cost of premiums is generally a lot cheaper if you are young and healthy which is why QQL always encourage people to get life insurance as early as possible. The type of policy will also dictate how much you pay on your premiums but as a rough guideline amount, here are some figures that QQL have recently obtained for our customers;

Policy type

Monthly premium

indexed

occupation

Age

Over 50’s

£10.00

Yes

Process operator

    51

Whole of life

£10.44

No

Fork lift driver

    55

Level term

£13.18

No

Laundry worker

    43

Decreasing term

£9.60

Yes

Metal polisher

    39

Critical illness cover

£13.75

(based on level term)

No

Plumber

    21

Income protection

23.23

Yes

Airline cabin crew

    33

Trusts and taxation

There is a great hack to avoid inheritance tax on your estate and it’s called Life Insurance. Putting your life insurance pay out into a trust for your beneficiaries is a great idea and one that is often overlooked with life insurance policies.

In normal instances, your life insurance policy would be part of your estate and therefore would be subject to inheritance tax, but writing your policy in trust can help to avoid this by paying the proceeds directly to the beneficiary rather than into your estate for them to access.

This may also mean that your estate, no longer buoyed by the life insurance pay-out, may fall below inheritance tax thresholds – currently £325,000 (above which your loved ones would have to pay 40% of anything over that amount)

Money in trust is also not subject to probate (a legal requirement before distributing money to your beneficiaries) meaning that your family can receive the money more speedily. A trust will also grant you greater control over how you want your policy to benefit you chosen beneficiaries, for example, withholding sums until you child is eighteen years old.

Ex-spouse Life Insurance

Where life insurance is concerned, a divorce might not be enough to change the beneficiary in some circumstances. Normally, upon your death, your life insurance pay out becomes part of your estate and is distributed according to your will. You would have to make changes to your will if you have named any ex-partners on there to receive part of your estate otherwise they would be getting your life insurance pay out too.

If you do not have a will then intestacy laws mean that your estate goes to your civil partner or spouse.

If your life insurance policy is in trust (and we recommend it is) then the named trustees and beneficiary of the trust might also need to be changed if they include an ex.

It is always worth reviewing your policy and the named beneficiaries around momentous times like a divorce, birth or change in circumstance. There could be an ex-partner named to receive your life insurance pay out that you can’t even remember naming.

Dividends

A participating policy with a life insurance company allows you a share of the insurance company’s profits in the form of dividends. The participating policy is usually a whole of life cover that pays dividends to the policy holder just like shares pay to an investor.

These dividends can be accepted in the form of a cheque from the insurer to cash or; in lowered premiums, left in savings or; used to purchase more life insurance products.

If your policy is not guaranteed then you may not receive dividends at all, as the performance and profit of the insurance company can, and most probably will, vary over time. If your policy is guaranteed then you will pay higher premiums which the insurance company will use to pay you if the company’s profits have been down.

Dividends earned from participating policies are not taxable as the profit from the insurance company was essentially made, in contribution, by you – so they are not dividends in the traditional sense.

In this sense, the tax office treats a participating policy dividend as if it were a refund on an overpayment of a premium back to you.

Obviously a participating guaranteed policy over regular term insurance is going to be more costly but could give you over all a financial benefit over time if you pick the right insurer with good performance rates. Quick Quote Life have access to a vast amount of insurance company data so if you are thinking of choosing this type of policy then we can certainly help you out.

Endowments

An endowment policy can be used to generate savings on your life insurance policy whilst simultaneously providing you with cover in the event of your death. The difference with an endowment policy is that the cover lump sum can be collected before you die at the end of set endowment periods.

Essentially it is a risk based savings plan that also offers you life insurance in the form of a sum of money that pays out to your beneficiaries if you die during the endowment term.

Even more fundamentally it is a savings plan with life insurance.

The way endowment policies work can actually be pretty straight forward but if you don’t understand this financial product then it is best to get independent financial advice so you know exactly what it is you are buying.

When you pay your premiums, some of the money pays the life insurance premium and the other part of the money is invested by the life insurance company.

Either you can choose to invest your money on a with-profits basis or on a unit linked basis.

A with-profits basis means that your money gets pooled with other investors and the insurance company invest this pool of money into shares, property and fixed-interest pathways. This then generates income to run the insurance business. Once company overheads are paid, the remaining amount (profit) is divided up between the with-profit basis endowment policy holders (you).

The profits are declared as bonuses that increase the value of your policy (the sum to be paid out). For example, if your initial policy cover was £100,000 then over a period of time your bonuses could increase that sum by thousands. You can then cash this investment in at the end of your endowment term and take the lump sum.

Remember that an endowment will only cover you for life insurance if you die during the term so if you finish that term and take your cover amount you will need to get a new life insurance policy.

If you choose to unit link your endowment then your money will not be pooled and you will be responsible for your own investment of your money - but will not be subject to charges from the insurance company on your bonuses. You will also not be guaranteed a minimum pay back if you unit link.

Endowment policies are guaranteed to pay back a minimum set amount at the end of their term or until death but this is the important bit – investment is risk based and so your return might be high or low in comparison to what you paid in. In addition to this, there may be charges if you choose to end your policy early.

Life Insurance for Children

It may seem strange and almost counter intuitive to insure the life of a child, not to mention morbid, but many people do.

Taking life insurance out on a juvenile can guarantee they will always have cover even if they develop a medical illness later on in life.

In the tragic event that the insured child dies then the pay-out could also offer grieving parents more time off work or income support for other surviving children.

With that difficult bit out of the way we can now concentrate on the savings benefits of insuring a child. A life insurance policy with a whole of life cover can generate a cash value. The child, when they are older can then borrow against that cash value or even end the policy and withdraw the money to use on a deposit for a house or university fees.

There are downsides associated with insuring a child on a life insurance policy and namely they are cost for return. Statistically there might be better ways to generate money through savings pathways that don’t involve life insurance. In addition, it is relatively cheap and easy to get life insurance later in life so you may not be protecting your child from too much hassle (unless they develop a serious medical illness).

For honest and detailed information its best to speak to one of our advisors or an independent financial advisor.

Extreme sports

People who jump off cliffs in squirrel suits, fly off the side of mountains on a board or dive to the bottom of the ocean may seem unlikely candidates for life insurance.

Thankfully, Quick Quote is amazing at listening carefully to our clients and then finding THE best life insurance deals out there, for the most unlikely candidates for insurance.

We have managed to insure a range of people with vastly different lifestyles. We always advice people to be completely honest when they apply for life insurance with us. We will use our key industry knowledge to find a policy that suits you.

That’s a chicken salad wrap

That’s all folks, that is all there is to know about life insurance – as a comprehensive overview, if you plan on doing your chartered financial analyst exams we advise you go a bit more in depth.

We hope you are now confident in understanding the terms and definitions.

If you now know that you will need a participating level term policy written in trust, or a whole of life endowment policy with critical illness cover, or even a simple decreasing term policy cover with a look at Income Protection then give us a call and save our advisors half a job – not to mention impressing them at the same time.

 

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