Five tips when buying life insurance
Nobody likes to think about what would happen to their loved ones when they die, but if you want to ensure your dependants are looked after, taking out life insurance is often a must.
Here is Moneywise's five-minute guide to buying life insurance:
1. Look after yourself
Ensuring you lead a healthy lifestyle will help reduce your premiums, as you’ll be viewed as less ‘risky’ by insurance companies – heart disease and high blood pressure, for example, are commonly linked to obesity.
According to Kevin Carr, director of protection development at PruProtect, the more unhealthy you are, the higher your premiums.
If you give up smoking for at least 12 months, this could also dramatically reduce the cost of your life insurance.
2. Start paying earlier
The earlier you take out insurance, the cheaper your premiums – as long as you take out a guaranteed policy, which means your premium will remain the same throughout the term. When you’re younger you’re usually healthier and fitter, and so are a lower-risk client.
Remember to take inflation into account, as the real value of your payout will be reduced over time.
Protection specialist LifeSearch suggests considering taking out an index-linked policy, so that its value keeps track with inflation.
3. Take out separate policies
Although taking out two separate policies will cost slightly more than a joint policy, Carr thinks the former is “better value for money” because you get two payouts instead of one.
A joint policy only pays out after the first person dies – therefore two payouts would be more beneficial to couples with dependants.
4. Use a trust
This will ensure the payout goes to the person, or people, you intend it to, rather than the taxman.
5. Be honest
Pretending you don’t smoke or only drink a couple of glasses of wine a week in order to cut your premium is pointless – your insurer might not pay out if it discovers you have been dishonest.
Also, always give as much detail as possible, and get regular checkups with your GP to ensure that the details in your policy are up-to-date.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.