The Beginners Guide to Protection

life insurance protection

Talking about Life insurance is usually on a par with talking about mortgages. Dry? Boring? Unfathomable? However both are essential and when done properly bring great peace of mind.

Here’s our handy guide, if you’ve got any questions then please don’t hesitate to get in touch. 

When might you need Life Insurance?

There are many different reasons for wanting/ needing a protection policy such as life insurance. There are also many things to take into consideration, such as how much cover to have and how long to have it for, but we will cover that later.

Taken out a mortgage – This is the most common reason that people first consider life insurance. You’ve just bought your first home and think that a life insurance policy is the thing you need. It could be, but it may depend on whether you are single or have a family, so you are best to speak to a professional to discuss this. However, assuming it is what you need, a life insurance pay out could allow your partner or family to pay off the mortgage after your death.

A life changing event – A life changing event is when something significant happens in your life. This could be the birth of a child, moving home, changing jobs, or getting married. If any of these events happen, it is important that you speak to your adviser to discuss the options available to you.

Funeral Cover – Life Insurance can provide your family with a lump sum of money which can be used towards the cost of your funeral, in the event of your death. At such a devastating time in your family’s life, this can really provide peace of mind.

Inheritance – In a nutshell you could leave your surviving relatives a lump sum of money when you die.

Definition: Life Insurance

Life insurance is a contract between an insurance policy holder and an insurer or assurer. The insurer promises to pay a designated beneficiary a sum of money in exchange for a premium, upon the death of an insured person.

Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policy holder usually pays a premium, either regularly or as one lump sum. Cover for things such as funeral expenses, can also be included in the benefits.

How much protection do you need?

There isn’t a simple or straightforward answer to this question. Everybody’s situation is different, and to a certain extent the level of cover you choose is a personal choice.

If you are taking out cover to protect your mortgage, its fairly straightforward to know the basic amount of cover you need.

If you’re looking to provide your family with a regular income after your death, then you should be considering how much monthly income they will need in order to pay the bills and maintain a certain level of lifestyle.

If your consideration is leaving an inheritance, or helping your family cover funeral costs, the cover may depend more on what you can afford to pay in premiums, rather the amount of money you want to leave.

What different types of protection policy are available?

Decreasing Term Insurance – This type of policy is generally taken out when you have a repayment (capital & interest) mortgage. It would usually last for the term of your mortgage, and the amount of cover you start with matches your mortgage balance. Over the years, as your mortgage balance decreases, so does the amount of cover you have. This results in a policy that is generally cheaper, as the older you get the less cover you have. It is the most basic type of policy you could have and is a good starting point when considering protection.

Level Term Insurance – With this type of policy, the cover you take out stays the same for the duration of the policy.  This type of policy can be used for a few reasons including providing cover for an interest only mortgage or leaving a lump sum of money to your loved ones. It is more expensive than decreasing cover because the amount of cover you have doesn’t reduce. As you get older you continue with the same amount of cover as when you were younger, so therefore the risk has increased.

Critical Illness Cover – This type of cover is generally taken in addition to one of the above forms of life cover. It can also be taken out by single individuals instead of life cover. In short, you don’t have to die to gain the benefit of this policy, but as a result it is more expensive. This cover pays out if you meet the insurers criteria for things such as cancer, stroke, or other critical medical condition. Because it pays out while you’re still alive, it can prove invaluable to support you and your family at the precise time you need help. It can be used to pay for treatment, cover your loss of income or even to create memories and take a dream holiday.

Whole of Life Insurance – With this cover you are guaranteed a pay out whenever you die because the policy does not have an expiry date. All you need to do is ensure that you pay your premiums each month. This type of policy is generally used when wanting to leave money to relatives for many reasons, including inheritance planning.

How long should your policy last?

Life cover is generally taken in one of two ways – either for a fixed term or for the whole of your life. When you take it for a fixed term it is known a term insurance. The other is obvious!

If your only requirement is to have cover for your mortgage or to provide your family with a safety net during this time, then term insurance is generally the ‘go to’ policy. It does have a downside though, if you outlive the policy term, then you do not receive a pay-out.

If, however you want to provide an inheritance, then your choice of policy should be whole of life.

Should your level of cover change?

This depends on your circumstances, and personal requirements, and in its most basic form, if all you require is cover for your mortgage, then as long as the policy is at least equal to your mortgage balance, then no, but circumstances change.

See the section above about when you might need life insurance, as this will tell you more. Here at Lodestone, we carry out regular reviews of our clients and their circumstances. You can rest assured that every time we review your mortgage, we will always review your protection. We also maintain contact with our clients at the very least on an annual basis so if there is an indication that there may be a requirement to update or amend something then we are ready to do so.

Does my partner also need cover?

If your cover is for a mortgage and that is in joint names then yes, we would recommend that both of you have protection. If you just want some simple life cover for your family, then it may just be the main breadwinner in the family that has the cover. 

However, never underestimate the ‘real life’ value of a homemaker. Have you got children, and would you need to arrange for them to be looked after and cared for whilst you continued to go to work, would you need help with housework and daily chores? The chances are that the loss of a partner would have some sort of financial impact, so it wouldn’t hurt to have some protection in place for them.

If you do decide that you both need some cover, you can either have one joint policy, or you can each have a single policy. If the policy is in joint names, then be aware that this will pay out in the event of the first death and then it will stop. If you each have a single policy, then even after one death the surviving partner will still benefit from their own policy. This is particularly useful if you have children, as it will enable you to leave something for them.

Having separate policies will cost you a little more than having one joint policy but remember it will provide you with a much higher level of protection.

Can anything affect the cost of the cover?

There are many things that affect the cost of protection, but firstly let’s talk about pricing in general.

Many clients talk to us about the adverts they see on TV, or cost comparison sites, and think that cheapest is best. Well, if money is tight, then yes, the price is important. However, let’s just remember that what you are protecting here is your life. Is it not worth ensuring that you have the best protection in place that you can afford? Are you really only willing to insure yourself with a ‘budget or cheap’ policy?

Let us give you a scenario: You are about to do a parachute jump, and you have a choice of 2 parachutes to buy. Do you buy the bargain, second-hand parachute that comes with no guarantees, or the brand new slightly more expensive one that guarantees to work every time? In short, cheapest is not always best, so rather than choosing to buy from a website or TV advert, without having met or discussed your situation with the adviser, speak to a professional who is qualified and knows your situation.

Other things that can affect the price of a policy are:

  • Age – The older you are the more expensive cover is.
  • Health – if you have had any health issues historically then this could have an impact on price.
  • Lifestyle – If you smoke or drink, then unfortunately these things will have an impact on the cost.
  • Family medical history – certain medical issues can be hereditary, and so if any close blood relatives have suffered, then this could have an impact.
  • Jobs and Hobbies – these might also affect the size of your premiums. If you work on high rise cranes or oil rigs, or like to climb mountains at your leisure, then be prepared for tis to have an impact on your premiums.

Tax savings and speed

Lastly, but by no means least, speak to your adviser about writing your policy in trust.

Doing this would mean that your family may be able to receive the pay out from your policy with the lowest possible tax charge and in the least amount of time.

Having your life insurance policy written in trust means that the cover does not form part of your estate and remains separate from the rest of your assets like savings, investments, and property. This has an impact on your estate for inheritance tax purposes. Putting your policy in trust is free and straightforward.

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