Life Insurance, The Universe And Everything
By Rachel Lane, Fri Dec 9th
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If you have yet to consider taking out any life insurance, don’tworry –there’s plenty of information out there includingconsumer organisations such as which? and moneynet. Start withsome simple, easy questions such as:
* Would my dependents need a lump sum, such as to pay off themortgage?
* Will they need a replacement income?
* Should my partner and I both take out life insurance?
You need to ensure whatever life cover you take outaccommodates funeral expenses, an emergency fund to encompasshousehold expenses in the short term, repayment of the mortgage,repayment of any other loans, inheritance tax, bequests in yourwill to people – in addition to your dependents, any otherpossible lump-sum expenses.
Life broadly falls into two categories: term lifeinsurance (protection only) and investment type. Terminsurance is the cheapest type of life and provides apay-out if the person / policy holder dies within a selectedperiod of years. If you survive beyond the given period ofyears, then no pay-out is given.
Investment advises that you should choose awhole-of-life option which is a form of investment type policy.Whole-of-life provides cover for as long as the policyholder lives. The policy must eventually pay out and thereforebuilds up an investment value which can be cashed in bysurrendering the policy. However, it often takes many years fora surrender value to build up and in general, whole-of-lifepolicies are expensive if your main requirement is protection,the same is true endowment policies. Endowment policies areinvestment products which pay out upon the death ofthe policy holder and also if they survive.
If you’re considering term life insurance, bear in mind thereare multiple variations encompassing increasing term insurance,increasable term insurance, decreasing term insurance, renewableterm insurance, convertible term insurance, family incomebenefit and pension linked term insurance.
Increasing term insurance
Increasing term is just like basic term insurance,except that, as the name suggests, the level of cover increases– typically alongside the premiums. This policy is suitable forlong-term as increasing prices reduce the value of afixed level of cover over policy period.
Increasable term insurance
Increasable term provides the option of increasing thelevel of cover either at specific intervals (such as anniversaryof policy start date) or specific events (such as marriage orbirth of a child). Premiums increase for additional cover, butthey are based on your health at the start of the policy, evenif it has since deteriorated.
Decreasing term insurance
Decreasing term reduces cover year on year, with thepolicy holder usually requiring the cover for loan repaymentssuch as a mortgage or to cover a potential inheritance tax bill.
Renewable term insurance
Renewable term gives the policy holder
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the option toextend the term when it comes to an end; the premiumpaid is the same at the start of the term, in spite of anydeterioration in the policy holder’s health.
This may be beneficial to parents whose children stay infull-time education longer than originally intended.Alternatively if someone cannot afford the cover for the periodthey want, they could take out cover for a short period andextend it later with slightly high premiums.
It might be a financial jungle out there, but it’s notimpossible to navigate your way through to financial security.
Resources:
About the author:About Rachel:
Rachel writes for the personal finance blog Cashzilla.
http://www.cashzilla.co.uk
Rachel eats a lot of Green and Black’s chocolate, particularlyMaya Gold –it’s delicious and fair-trade too.
