We at LifeSearch work in the field of life insurance each and every day and even we realise that the subject isn’t exactly high on the chosen topics for polite dinner party conversation. Which is why when the subject does come up and because life insurance is a complicated subject, it is incumbent on us to ensure the quality of advice we give is the best it can possibly be.
‘Complicated? What’s so complicated about life insurance?’ I hear you ask. After all, isn’t it simply a case of deciding how much you need, paying your premium, then crossing your fingers that the unthinkable will never happen and your dependents won’t need to go hunting for your dusty life insurance policy?
Well, the simple answer is this. If you want life insurance to be that simple, it can be. Mind you, you’ll most probably find that your decision making and the ability of the insurance provider to get you the best cover at the best price will be hopelessly flawed.
The right answer, is to seek the best professional life insurance advice possible, weigh up all the options and get the most appropriate policy, and the best value to match your actual needs and circumstances.
So let us give you a bit of a clue about how complex life insurance can be.
Did you know that your health also plays a part in calculating the type of life insurance or life protection you need and the premium you may have to pay?
Although there have been some significant advances in survival rates (cancer and heart attack for example), if you’ve had a serious illness or are historically predisposed to certain illnesses, you will incur a higher than normal premium. So family history is also taken into account when both considering and calculating life insurance rates. And as mentioned earlier smoking and your alcohol consumption will also influence the type of life insurance you can get and the amount you have to pay.
Some people decide to protect themselves against health issues they are yet to encounter. In other words they opt for a type of cover that protects them against illness (or an accident) rather than death. Why do they do this? Simply because they calculate that if they become seriously ill with a condition they are not expected to survive (Critical Illness Cover), or are unable to work because of sickness or injury (Income Protection), they may not be able to work, but will still need to house, clothe, feed, even educate their dependents.
Did you know that your occupation is important when calculating the type of life insurance you can get and the price you will need to pay? For example, employment featuring elements of danger or risk are also of interest to the life insurance underwriters (more on them later). Full-time employees are lucky enough to have death in service benefit life insurance. But the norm is for companies to only offer employees three or four times their annual salary. Not really enough to keep your dependents in a comfortable lifestyle and some way short if you were unfortunate enough to die young. Others, such as the self-employed would be wise to arrange their own life cover, and supplement it with an Income Protection policy, to replace the income they would lose if they became ill or were injured and therefore unable to work for long periods of time.
Did you know that even the recreational pastimes you pursue can affect the amount you pay for life insurance? Providers take great interest in sports such as hang-gliding or mountaineering, because to practice them a person carries extra inherent risk.
Did you know that over and above the process of arranging life insurance, there is the bearing that your policy, were it to pay out on your death, has on others aspects of your dependents financial future? The greatest of these is Inheritance Tax. We will cover this later, but to keep it short, when you die all of your assets (the value of your house for example), your investments (equities, ISAs) and chattels (even the chair you are sitting on right now) is calculated into what is known as your estate. They alone may take you over the Inheritance Tax (IHT) threshold currently standing at £312,000, but when you add in the value of your life insurance payout, look out! Everything over £312,000 is taxable to the tune of 40%. That’s a lot of money you’re dependents could have done with.
Mercifully there are ways to get around this and any professionally qualified life insurance adviser will tell you about trusts. Trusts is also a subject we will dwell upon later.
Do you know?
Did you know for example that there are many different types of life insurance? There’s Level Term Life Assurance, Increasing Term Life Assurance, Decreasing Term Assurance, Renewable Term Assurance, Whole of life, Mortgage Protection Assurance, Family Income Benefit Assurance and more.
Did you know that there are other types of life protection associated with life insurance which may well be more appropriate for your total life insurance needs? Critical Illness Cover for example.
Did you know it’s your individual circumstances and your decision making that often makes finding the right policy so complicated. Why for example, do you think you need life insurance? Is it because you are thinking of getting married and require life insurance, because you now have a dependent? Is it because you are thinking of buying your first (or next) home and need life insurance to cover a mortgage? Then there are children to consider. With every new child (dependent), the amount of cover you need – grows!
Did you know that the period of time (term) you want your life insurance to run for is also key to how much you will have to pay? This general rule seems to apply. The younger you are when you first arrange life insurance – the cheaper it will be. So it follows that the later you start your life insurance and the less time there is practically for your life insurance to run – the more expensive it could be.
To arrange any type of life insurance over the age of 65 is usually expensive, which is why most people elect to have their policy run near or up to retirement age. By then they calculate that the mortgage might well be paid up, or the children will have flown the coop. But in an ever changing world, who is really to know?
Did you know that when thinking about the amount of life insurance you need, it is also important to think about the future, as well as the now? You can most probably make a pretty good guess at what levels of cover you need should something happen to you tomorrow, but what about in say 10 or 15 years time? As your children grow, it will cost more to clothe and feed them. If you’re no longer around, it may be the size of the payout that makes the difference between private vs state education. Life insurance may well be the difference between your children being able to afford to go to University, and not.
Did you know that there is no such thing as a ‘normal’ premium for a life insurance policy? An individual life insurance premium is based on an individual’s particular criteria. Your age will have a direct bearing on your premium. As will your lifestyle.
If you are a smoker, your premium will be higher. The job you do may mean you have to pay more for your life insurance.
What is life insurance and why do we need it?
Put very simply, in an uncertain world, life insurance (or general life protection) is what you need if you wish to protect those you love most from financial hardship should you be unfortunate enough to suffer an untimely death.
What this means is that because you have dependents (a wife and children possibly), and/or a mortgage, you need life insurance to cover their living expenses because you are no longer around to financially provide – the food they eat, the clothes they wear, quite possibly their education, the car they need, the roof over their head, both now and in the future.
There is also a type of life protection called critical illness cover, which pays out in a similar fashion if you are diagnosed with a serious or chronic health condition from which you are not expected to survive.
Then there’s income protection insurance, designed to pay out a monthly tax-free sum should your income cease because of non life threatening but potentially long-term illness or injury.
Who would argue against life insurance being anything other than an eminently good and responsible idea.
A typical life insurance policy will feature an amount insured (paid out as a tax-free lump sum or monthly payment to aid family budgeting). The amount insured will attract a premium (a monthly payment by Direct Debit). The premium will depend on how much you insure for, how old you are, what combination of life insurance and life protection you require, and for how long (the term) you wish the policy(ies) to continue for.
So you decide (by quite properly taking some expert advice) what is required for your dependents to comfortably live on if you’re no longer around. You then have to ‘future project’ a little to calculate how long you’d like them to live at that level of financial existence. Naturally enough, you’d like for them to have a few luxuries on the way. You will most probably need to make an educated guess as to when your children will fly the nest. Naturally enough, the amount you owe on a mortgage will also play a huge part in your thinking.
Then, you may wish to consider the possibility of your income stopping because of serious ill health (either terminal or long-term) or injury.
Indeed industry opinion suggests that IF you wish to do the responsible thing and leave your dependents with a life style not too dissimilar from the one they are used to, you should aim to have cover (or a mix of life insurance types to cover all the possibilities mentioned so far) totaling at least ten times your annual salary – if not more. If that sounds like a lot, then think about it this way for a convenient example.
You earn £30,000 a year and let’s assume you lose around 40% of that to various income taxes. Your take home pay is in the region of £18,000 per annum. This amount keeps you financially comfortably and affords you and yours the occasional, if not too ostentatious luxury. You have a death in service benefit life insurance scheme which is four times your annual salary. You have a mortgage (probably a large one by current house price trends). You are still young and would reasonably expect to live (and work) past 65 years, say 25 years from now.
By which time your one or two young children will have left home to go to University. Remember that the days of local authority grants seem to be gone forever. Your spouse may well have a small income, but it is a bonus and not the mainstay of the family income. You have a job (although not one of those offering ‘employment for life’), and there is a nagging in your mind about ancestral health issues (dad had heart problems or Auntie Mabel died of Cancer).
Scenario 1. Mortgage cover, but no other life insurance.
Calamity! Your dependents bubble is burst by your unfortunate and untimely death. The good news is that you have life insurance to cover the outstanding mortgage. After all that was a prerequisite of getting the mortgage in the first place. The bad news is there is no life insurance to cover other living expenses. That has far reaching effects.
1. Your spouse may well need to become the full-time bread winner. How easy will it be for them to resume a career after so long at a salary level consistent with yours?
2. What effect will that have on childcare and will they now have to pay for it?
3. Factor in the fact that your family is growing and ever demanding. They will eat more, need more expensive clothes, want ‘the same trainers as Johnny’ etc.
Scenario 2. Mortgage cover and death in service life insurance.
Still bad news. The mortgage is covered and your dependents benefit from a payout of £120,000 (only 6 and a half years of financial subsistence). Frankly, that’s still not enough.
Scenario 3. Mortgage cover and life insurance.
Alas you’re still not with us, but better news for those you leave behind. This time you’ve had the wisdom to arrange life insurance at ten times your annual salary. Your dependents will be entitled not to ten times your annual salary after tax of £180,000 (about 10 years of financial subsistence), but ten times your annual salary TAX-FREE. That’s £300,000 (about 20 years of financial subsistence).
As stated before, these figures are very convenient. They don’t for example take into account inflation eating into a lump sum over a period of time. There’s no allowance made for money being frittered away in the same way it does for most mere mortals.
But by the same token, it doesn’t take into account that your spouse is financially canny and deposits some of the cash in investments and savings to earn an extra income.
But the scenarios do demonstrate some points.
- By implication, having dependents and no life insurance is a recipe for disaster, whether you have a mortgage or not.
- That often a too narrow or specific life insurance policy (mortgage cover alone for example) can still leave people vulnerable.
- Having some life insurance is good and responsible, but not enough can also leave people vulnerable.
- Death in service benefit (sadly, like occupational pension schemes a rapidly disappearing employment benefit) are good, but not good enough.
The argument for ten times annual salary, as the industry commentators suggest, does seem to hold water.
Armed with this type information, you’re certain to be amazed. Most people have no problem arranging for short-term insurance on chattels like cars and washing machines, or when taking a holiday, but it never ceases to surprise how many people fail to make arrangements for very real, long lasting and potentially ruinous misfortune.
The reason could partly be one of affordability, but the fact remains that life insurance premiums have never been as low as they are now and will most probably not be this low again. It could be to do with misunderstanding or ignorance as to how important life insurance is in the fabric of a family’s general financial planning needs. To this end, both the financial services industry and the Government is making strides to reverse this trend. But it may also have something to do with the perceived complexity of arranging a life insurance policy, which companies such as LifeSearch are keen to redress. Conversely, it may also have something to do with apparent ease by which people can arrange simple (if often unsuitable) life insurance from supermarkets and the like.