Private health and protection insurance expert and editor
Understanding the benefits of life insurance is key when selecting a suitable policy. In this guide, we cover exactly what the benefits are and why you might need a life insurance policy.
We all have people that we care about and who care about us, but how would they cope if you were no longer around? The death of a loved one brings its own difficult challenges with potential financial issues being just one of those. No longer being able to meet financial commitments, such as your mortgage and utility bills, can severely affect those who are left behind.
The primary purpose of a life insurance policy is to provide family members with an amount of money that can be put towards bills and expenses while longer-term solutions can be found. A life insurance policy should remove the immediate headache of where money is going to come from, often paying off debts such as a mortgage.
The first benefit of life insurance is that it provides you and your family with peace of mind, that should the worst happen the family won’t become financially destitute. While there are any number of reasons why you may want to take out life insurance, most can be broadly summed up as “peace of mind”.
There’s a variety of life insurance policies to choose from, each providing that peace in their own way. In another recent article we outlined the Best life insurance in the UK which is well worth a read if you’re trying to choose the right policy.
The range and number of expenses we all have seem to grow on an annual basis. At one time, there were fewer commitments, but today almost everything seems to be tied to a contract or subscription.
Of course, when we make financial commitments we tend not to be thinking about dying before they can be settled, but what if the worst were to happen? How would those commitments be paid? One of the benefits of life insurance is that it can help your loved ones with these expenses.
With 1 in 10 (9%) of us having no savings at all, and up to a third of Brits having less than £600 in their savings accounts, it’s no wonder that we’re looking for another type of protection for our families.
The benefit of a life insurance policy is that it can mitigate a lack of savings after you die, whether that be to help cover the cost of expenses such as your mortgage, or merely to help cover the cost of your funeral.
Life insurance isn’t a savings account and shouldn’t be treated as such, but it does help families who have little in savings, should the breadwinner pass away.
For most of us, the purchase of a home will be the largest amount of money we’ll spend in our lifetime, and if you have a mortgage on your home you’ll want to make sure your family can continue to live there after you die. Both term and whole of life life insurance policies are usually set up in a way that would clear part if not all of your mortgage in the event of your death. When you’re speaking to a life insurance broker they’ll ask you how much is outstanding on your mortgage and you can decide how much of it you would like to be covered by your life insurance policy.
So far we’ve looked at the general benefits of most life insurance policies; in the next section we’ll drill down into the types of policies and their specific advantages.
Both level and decreasing term policies are typically linked to the financial commitments that your family would need to continue to pay in your absence. They’re usually set up to mirror your mortgage length, so 25, 30 or 35 years would be a normal term. The primary benefit for term and decreasing term life insurance, in addition to those already mentioned, is the cost. As there’s no guarantee that the policy will pay out and the policy is for a set amount of time, these policies are almost always cheaper than whole of life policies.
Whole of life policies protect you for your entire life - the level of protection doesn’t decrease or expire. The primary benefit of whole of life policies is that they are guaranteed to pay out as long as premiums are kept up to date. With whole of life insurance, you’re virtually guaranteeing your loved ones will receive a payout when you die. The downside is that whole of life insurance premiums tend to be much higher than term life insurance policies.
Critical illness cover is a type of insurance that’s typically purchased in conjunction with life insurance which pays out when you’re diagnosed with a critical illness.
The money can be extremely useful in covering things like medical costs or simply to cover your expenses if you can’t work.
Depending on the policy you choose and the amount you spend on it, you’ll have a set list of conditions that’ll be included.
Life insurance does come with some tax benefits - unlike many types of income your dependants won’t have to pay income tax or capital gains tax on the proceeds of your life insurance policy. However, it is possible that they would need to pay some inheritance taxes on the payout.
Any money or property you leave to your family is tax-free if its total worth is £325,000 or less - but everything above that is taxed at 40%; this includes the value of the lump sum from your life insurance. There are a number of ways to avoid this though which you should discuss with your life insurance broker when taking out a policy. One of the most popular ways of keeping your insurance tax-free is to put it into a trust.
If your life insurance is put into a trust, it’s no longer considered part of your estate, so isn’t subject to inheritance tax. In addition, when you use a trust, your loved ones often receive the money much sooner as you’ve already set up the terms of the trust and there’s no need to refer to your will.
Most insurers and brokers will help you with the process of putting your insurance into trust and it’s usually free of charge. Just bear in mind, once a policy is put into trust it’ll make changing it more difficult at a later date.
Disclaimer: This information is general and what is best for you will depend on your personal circumstances. Please speak with a financial adviser or do your own research before making a decision.
As the founder and editor of myTribe Insurance, the role of Chris Steele is to ensure that the information we provide is of the highest quality and value to those who read it.
