Is it time to reassess your life cover?
Today, the average age of a first-time mum is 28.5 years, while dads wait nearly five years longer until they're 33.1 years. Some mortgage lenders will deal with borrowers aged up to 90, and there's no longer any compulsion to retire, with more than one million people working beyond age 65.
But these delays in taking retirement can also mean your need for protection extends later into life.
Should you take out cover?
“If you've got debts or financial dependants such as kids or a partner, or you're working longer, your insurance needs will last longer too," explains Alan Lakey, senior partner at specialist adviser Highclere Financial Services.
“If anyone would struggle financially if you weren't around or you were too ill to work, you should consider taking out cover.”
Life insurance pays out a lump sum if you die, with many plans fast-forwarding this payment if you're diagnosed with a terminal illness and have less than 12 months to live.
There is also a policy, family income benefit, which runs for a set period of time, for instance, for 20 years.
If you die within the term, a regular income will be paid for the remaining years. This suits many family situations, and as the potential payout reduces over the years, it's cheaper than a lump sum plan.
Critical illness insurance
On the protection side, critical illness insurance pays a lump sum if you're diagnosed with a potentially life-threatening condition such as cancer, heart disease or stroke.
Income protection pays a replacement income if you suffer an illness or injury that stops you working long term. The most common claims are for cancer, mental health and musculoskeletal conditions.
Thankfully the maximum ages on these plans are increasing to reflect lifestyle changes.
For example, you can take out a term life assurance that runs until age 90; critical illness insurance up to age 85; and income protection up to age 70.
But as the risk of a claim increases with age, all these types of cover do get more expensive as you get older.
With critical illness insurance, the premium increase is even more dramatic. Lakey says that as a result, people will often take a smaller amount of critical illness insurance.
“Someone might cover the full mortgage with life assurance but only take £25,000 to £50,000 of critical illness cover,' he says.
“This cuts the cost, but also means they would have access to money if they wanted to take time off work, pay for private treatment or go on holiday.”
Income protection costs also increase dramatically. For example, at 50, an office worker would pay £54.62 a month for £1,000 of cover a month, payable after a 26-week waiting or deferred period; by age 60, it would have increased to £106.59.
Extending the waiting period can bring down the cost a little. For example, by putting savings in place to enable you to wait 52 weeks, the monthly premiums fall to £51.32 and £100.59.
Alternatively, you could plump for a shorter payment term. Insurers offer payment terms of up to five years, which may be suitable if you have a pension waiting in the wings.
Leaving a legacy
Even if you've retired, ditched the debt and the kids have left home, there can still be a need for protection.
Steve Casey, head of marketing and propositions at AIG Life, explains: “Someone might take out life assurance when they're older to leave some money to their loved ones or to cover the cost of their funeral.
“It can also be used for school fees planning or, more commonly, inheritance tax (IHT) planning, enabling someone to leave a lump sum to cover a future liability.”
Even when the main residence nil-rate band is introduced in 2017, many people will still find they're left with an IHT liability.
Once the full £175,000 per person is available in 2020, when combined with the £325,000 IHT nil-rate band, it will enable a couple to pass on an estate worth £1 million.
However, this will only be the case when the property is worth at least £350,000 and they are leaving it to a direct descendant.
Where estates are worth more than £2 million, the main residence nil-rate band will be progressively eroded: a couple with an estate worth £2.7 million will not get a penny of the extra allowance.
Whatever the reason for leaving some cash when you die, a whole-of-life plan may be worth considering.
Jennifer Gilchrist, senior product development manager at Royal London, explains: “These plans are more expensive than the alternative, term assurance, but as long as you don't let premiums cease, they're guaranteed to pay out.”
As an example of costs, while a 45-year-old non-smoker taking out £150,000 of cover to age 90 would pay £43.24 a month with Royal London, if they went for a whole-of-life plan the cheapest is £104.46 with Scottish Widows.
There are two types of whole-of-life plan. One option is a product that is medically underwritten in the same way as term life insurance products; the other is a 'guaranteed acceptance' plan.
They are commonly sold direct, and as long as you're aged between 50 and 80, you'll be offered cover. These design differences mean the two products suit very different markets, as Chris McNab, protection proposition manager at LV=, explains.
“With the guaranteed acceptance plans you can select a monthly premium or a level of cover, up to £25,000. This tends to make them popular for funeral expenses or to leave some money for loved ones. If you need more cover, an underwritten plan may be more suitable.”
Your health can also have a bearing on which type is more suitable. With the guaranteed acceptance plans, individuals with poor health will get the best value, at the expense of their healthier peers who may be better off being medically underwritten.
Whichever type you go for, make sure you understand the financial commitment.
Casey explains: “Some plans have reviewable premiums which can start out cheaper but increase as you get older. Most people prefer the certainty of a guaranteed premium, especially if they have a fixed income.”
However, the guarantee of a payout means that if your insurer gets its sums right, these plans are effectively a payment plan with total premiums equalling the eventual payout. As a result it may be worth looking at other ways to achieve your goals.
For example, timely and astute financial planning can help reduce all but the most stubborn of IHT problems, while a pre-paid funeral plan will guarantee these costs are taken care of, however long you live.
What to do if you’re struggling to get cover
It's an unfortunate fact that as we get older, we're increasingly likely to pick up health problems and long-term conditions. Sadly, these can significantly reduce your chances of getting cover.
“You're much more likely to be declined or have exclusions added to your policy, but the approach will vary between insurers,” says Alan Lakey of Highclere Financial Services.
Even if you're in good health, you could still find yourself needing to provide medical evidence.
As an example, Emma Thomson, life office relationship director at LifeSearch, says that while a 30-year-old might be able to get £1 million of life cover without facing any additional questions on their health, by age 50 the amount will have fallen to around £300,000 and by age 75 to just £50,000.
“If you're healthy, it can often be better value to have a medically underwritten plan than to go for an over-50s plan with guaranteed acceptance,” she explains.
If health problems mean you're struggling to get cover, two providers, Partnership and Pulse, specialise in protecting people with health conditions.
Put your policy into a trust
Whether you take out a 10-year life policy at age 45 or a whole-of-life plan at age 75, it's worth writing it in trust. 'Putting a life policy in trust ensures it's paid to who you want it to be paid to,' explains Emma Thomson of LifeSearch.
“It will also mean the money is outside your estate for IHT purposes, potentially saving your family a further liability.' To put that in context, a £200,000 life insurance payout could spark an IHT bill of up to £80,000.
Writing a policy in trust is easy. Whether it's a new policy or one you took out years ago, your insurer can provide a trust form and all you need to do is provide details of the beneficiary and trustees.
Some of the insurers are making it even easier. For example, AIG Life has an online form which cuts out the hassle of getting trustees' signatures.
Steve Casey of AIG Life, adds: 'We wanted to make it as easy as possible to do this. Around 90% of life policies would benefit from being written in trust, but a significant proportion of them aren’t.”
This story was originally written for our sister magazine, Money Observer.
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).
Term assurance provides cover for a fixed term with the sum assured payable only on death. Term assurance premiums are based primarily on the age and health of the life assured, the sum assured and the policy term. The older the life assured or the longer the policy term, the higher the premium will generally be. There are generally two types of term assurance. Level term assurance premiums are fixed for the duration of the insurance term and a payment will only be made if a death occurs during the insurance period and with decreasing term assurance, life cover decreases during the insurance term reducing the cash payout the longer the term runs and this is reflected in the premium.
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.
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.
Critical illness insurance
This cover pays out a tax-free lump sum if you become seriously ill. All policies should cover seven core conditions: cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. You must normally survive at least one month after becoming critically ill, before the policy will pay out. Payouts are determined by premiums and premiums are determined by the severity of your illness, the less severe the lower the premiums.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.