Money Minder UK

Life Insurance

Life insurance is often considered as the most important part of everyone's basic financial planning needs. So important in fact that mortgage lenders have been known to insist on life insurance being in place as a condition of them lending money. We built this fact centre to provide you with all of the important information you need to know about life insurance and the different types of plans available, right from the very basics, through to the finer details you need to know about if you are considering some of the more complicated plans like 'whole of life' assurance plans.

There are plenty of companies ready and wanting to sell you life insurance, offering a wide variety of products at varying rates. The confusing small print varies between them all.

That's why in this life insurance fact centre we provide you with lots of free information that will outline the pros and cons of different types of policies, include helpful hints and tips and provide you with lots of information to help you make the right decision about protecting your family and their lifestyle.

As well as using this fact centre to guide you through the life insurance buying process step-by-step, you can also use our industry exclusive Life Insurance Finance Navigator to establish and resolve your own life insurance needs easily and simply.

Our philosophy online is the same as the philosophy that has helped us to build long term successful relationships with our face to face clients - we are not here to tell you what to do, we are here to help you to understand all of the pros and cons of the different solutions available to you so that you can make an informed buying decision for yourself.

Next: What is life insurance?

If you've ever wondered how your family would cope if the main wage earner passed away then the answer is likely to be life insurance.

Life insurance pays out a sum of money when the person who is covered by the plan dies. The money provided is intended to pay off any outstanding debts and support your dependants financially by providing them with a further lump sum or a regular income if you die.

The correct name for this type of protection plan is life 'assurance' instead of life 'insurance' because death is at some point guaranteed - so you are 'assured' that the plan will definitely pay out one day as long as you have paid all the premiums and you die whilst the plan is in force. In return for paying the premiums, the insurance company will pay out the agreed amount - known as the 'sum assured' - if you die during the term of the policy.

Premiums are normally paid to the life insurance company on either a monthly or annual basis for a fixed period of time or in some cases, until death eventually occurs. The cost of these plans vary according to your personal circumstances such as age, previous medical history and the amount of cover you require.

Most people set up life insurance policies to, at the very least, pay any off outstanding debts such as a mortgage or loan. Many people choose to provide sufficient funds to see their children through school and then university if necessary. This helps to ensure that your family is not left to struggle financially in the event of your death.

Policies covering more than one person, known as joint-life policies, are also available. These pay out in the event that either you or your partner dies during the lifetime of the policy. Life insurance companies can often combine this cover with critical illness insurance.

A life insurance plan is essentially a bet between you and the provider. Neither you or your insurer wants you to die while you're covered, but if you do at least you know your family is provided for financially. The younger you are the cheaper life insurance is and premiums are priced to reflect this.

If you're not sure about how much life insurance you need for your current situation, you should speak to an independent financial adviser. Alternatively, you can use our interactive online research tool, the Finance Navigator. Based on the answers you give to a number of targeted questions, the Finance Navigator will help you to establish your own life insurance needs. It will then produce a bespoke guidance report for you to read through to help you make an informed decision. It will also allow you to learn more about some of the most commonly used life insurance plans.

Once you have your report, you can then use our online quotation system to find some of the most competitively priced life insurance plans from a selection of major UK life insurance providers. Once you have found the right plan for you, use our 'apply online' facility.

People take out a life insurance policy for a variety of different reasons, but the fundamental underlying reason is to ensure that funds are available in the event of the death of someone who has a financial responsibility to someone else.

Each case is different but most people take out life insurance to ensure that their family is financially secure and can continue to maintain their standard of living after an unexpected death.

Life insurance policies tend to pay a lump sum and therefore a calculation will be needed to establish exactly how much life insurance you should have in place. If you are specifically looking for a direct replacement for lost income in the event of a loved ones death, a family income benefit plan may be an alternative to a normal lump sum based life insurance plan. The payout is usually calculated according to the earner's net salary, the number of years it will be needed to maintain the family, as well as any additional expenses.

One of the most important and most common reasons for putting a life insurance plan in place is to protect a family against the untimely death of a parent. This is especially important whilst children are young. Over and above the need to make sure that the main wage earner has life insurance in place, it is important to make sure that the family could survive in the event of the parent that spends most time with the children dying as well.

It is a common mistake to financially undervalue a non-employed spouse or partner. If they were to die unexpectedly the surviving parent may need to either change to part time hours or even give up work altogether to look after the children or pay for childcare. Either way this could prove very expensive. The level and cost of the childcare needed will depend on the ages of the children. Knowing how much childcare might be required and for how long will help you to establish the cost of putting that care in place. Once known this will also help you to determine how much life insurance should be put in place for this specific purpose.

Life insurance is also sometimes put in place to cover the cost of education expenses if there are children that are at a private school or are already expected to attend university. The death of a main wage earner could mean that school fees and/or university tuition and expenses for children may not be affordable and in these cases a payout from a life insurance policy would help to ease the financial strain.

These important plans are often also commonly used to cover an outstanding mortgage debt. In addition to covering a mortgage debt, as the modern consumer culture plunges more and more of us further into debt via personal loans and credit cards, many people want to ensure that these personal debts are not passed onto their family - a life insurance policy can help them to do this.

If you have any form of financial responsibility to some one else, it is likely that you will need life insurance.

There are some exceptions. If you have no debts, own your house out-right, or if you have a large amount of savings or other significant sources of capital or income that could be called on by your beneficiaries in the event of your death, life insurance may not be as necessary.

If you're particularly wealthy you may still require life insurance as a strategy to reduce the impact of inheritance tax for your beneficiaries

In most cases, the minimum amount of life insurance that should be in place should be enough to settle any outstanding debts and cover funeral costs. The amount of life insurance you need depends entirely on your own personal circumstances.

It's generally considered that if you have anyone, especially dependants, who would be financially disadvantaged by your death - i.e. by having to sell your family home due to the inability to keep up mortgage repayments, or would be liable for the cost of bringing up your children, - life insurance should be a high priority for you.

Even if on the face of it your family or dependants wouldn't be financially disadvantaged by your death due to a partners ability to continue to work, it may still be advantageous for you to consider putting life insurance in place in order to help you family maintain the lifestyle they have become used to.In the short term, you may even prefer for your widow or widower not to have to go to work at all whilst they come to terms with your death and readjust their lifestyle to cope with the loss. This may be even more important if you were to pass away unexpectedly.

It may not be just life insurance that you need. Similar protection products such as critical illness cover and income protection plans make provision for the unexpected so if you don't currently have any financial protection plans in place you should extend your research to cover these areas as well.

If you're interested in researching life insurance further you should speak to an independent financial adviser. Alternatively, you can use our interactive online research tool, the Finance Navigator. Based on the answers you give to a number of targeted questions, the Finance Navigator will help you to establish your own life insurance needs. It will then produce a bespoke guidance report for you to read through to help you make an informed decision. It will also allow you to learn more about some of the most commonly used life insurance plans.

Once you have your report, you can then use our online quotation system to find some of the most competitively priced life insurance plans from a selection of major UK life insurance providers. Once you have found the right plan for you, use our 'apply online' facility.

Life insurance is similar to other insurances you may have - you pay a premium to the provider who provides you with an agreed level of cover then, if you die whilst the plan is in force, the provider will pay the agreed sum assured to either the named beneficiaries of the plan or your estate.

The amount you pay for life insurance will depend on a number of factors including: how old you are when you set the policy up, how long you need the cover for, pre existing health conditions, your health at the time the policy is underwritten, whether or not you are smoker and the level of cover you require.

Underwriters decide the level of premium you will need to pay based on the information you give to the insurance company in the application form and any medical evidence they gather as part of the normal application process. Their job is to try to establish the level of risk they are taking that you may die and therefore the likely hood of them having to pay out a claim on the policy you are looking to set up with them. The higher the risk, the higher the premium is likely to be.

Risk is rated according to a variety of factors as mentioned above and will sometimes also include the activities that you undertake at work or in your leisure time. Non smokers normally pay quite significantly less than smokers for all their personal financial planning protection products including critical illness cover and income protection as well as life insurance.

Life insurance does not pay out a lump sum in the event of you falling unexpectedly and seriously unwell - if you are looking for a policy that will cover this possibility you should look more in to critical illness insurance. If being off work due to an accident or illness would cause you financial concern, you should also research income protection plans.

If you're interested in researching life insurance further you should speak to an independent financial adviser. Alternatively, you can use our interactive online research tool, the Finance Navigator. Based on the answers you give to a number of targeted questions, the Finance Navigator will help you to establish your own life insurance needs. It will then produce a bespoke guidance report for you to read through to help you make an informed decision. It will also allow you to learn more about some of the most commonly used life insurance plans.

Once you have your report, you can then use our online quotation system to find some of the most competitively priced life insurance plans from a selection of major UK life insurance providers. Once you have found the right plan for you, use our 'apply online' facility.

The key to getting the best deal for most financial products, and particularly your life insurance policy, is to take your time and carefully search for the policy you want at the price you can afford.

We have produced a comprehensive guide listing the main features of the most commonly used life insurance plans.

You can print these guides off before committing to a specific purchase to make sure are buying the plan that you believe will most suit your needs

If you have, or are planning to set up a life assurance plan on an 'own life' basis, on death the proceeds are added to your estate and inheritance tax may be payable. Potentially, this could mean that the benefits paid out might be chargeable to tax by as much as 40%.

For life assurance plans that have been set up to provide financial security for your dependants rather than pay off a debt, it may be beneficial to put the plans in trust. The possible advantages of this are:

  1. To pay the benefits out more quickly as the beneficiaries do not need to wait for probate.
  2. To protect the benefits being paid out from creditors of your estate.
  3. As the plans are paid out to specifically named individuals or a group of individuals, they should not form part of your total estate value for inheritance tax purposes.

Possible disadvantages to putting life assurance plans in trust are:

Once you have decided who the beneficiaries are to be, changing them may not be an easy process.

Even after you have stated who the beneficiaries of the plan are to be, your executors will have little or no control over the payment of benefits from the plan, even if after your death, in hindsight it would have been better to have paid the proceeds of the plan out to someone else, the executors may not be able to do so.

Setting up a life assurance plan on a 'life of another' basis

As an alternative, it is also possible to set up a life assurance plan on a 'life of another' basis.

For this to be allowed, an 'insurable interest' must exist. Instead of you being the owner of the plan, another individual (such as a spouse or partner that can prove an insurable interest), is the owner of the plan and on death the proceeds are paid directly to that individual. Once again, as the other individual is the owner of the plan, the proceeds do not form part of the deceased's estate for inheritance tax purposes.

Possible disadvantages of setting up a plan on a 'life of another basis' are:

A third party such as a partner or spouse owns the plan. If in the future your relationship with that third party breaks down, the plan may no longer be appropriate and may have to be replaced at a significantly increased cost, (assuming there have been no changes to your health that may make it more difficult to get the cover you are looking for) or you may have to try to get the plan assigned back to yourself which may not be easy to do.

Whilst in principle you can have the benefits from a life insurance plan you have taken out on your own life payable to pretty much anyone, most people tend to want the beneficiaries to be their husband, wife or a dependent partner or relative.

Life insurance plans can be set up on a 'life-of-another' basis, however, you must be able to prove an insurable interest between the person whose life is to be covered (the life assured) and the policy owner who would benefit from the plan proceeds in the event of the life assured's death. This helps to prevent people taking out life insurance plans on other people in the hope that they might gain financially from the death of a non related 3rd party. Insurable interest is automatic for spouses and civil partners but may be more difficult to prove if someone other than this was to be the policy owner.

If you are considering assuring your own and your spouses (or a dependent partners life) at the same time, a joint-life policy is a popular choice and will mean that unless stated otherwise, the beneficiary of a joint plan is most likely to be the surviving joint owner of the policy. However, this is not always the cheapest option or the most efficient way of meeting a couples life insurance needs.

This is due to the fact that whilst the cost of two individual plans can often be very similar to the cost of setting up one joint plan, on the death of the first, the policy will pay out and leave the surviving individual with no cover.

Additionally, for inheritance tax planning reasons, people with larger estates (in excess of £325,000 for individuals or £650,000 for married couples, tax year 2010/2011), it may be better to put life insurance plans in trust and to have them pay out directly to beneficiaries other than a spouse or civil partner, like children or grand children.

Beneficiaries aren't limited to family, business partners will normally have an insurable interest in each other.

If you're interested in researching life insurance further you should speak to an independent financial adviser. Alternatively, you can use our interactive online research tool, the Finance Navigator. Based on the answers you give to a number of targeted questions, the Life Insurance Finance Navigator will help you to establish your own life insurance needs. It will then produce a bespoke guidance report for you to read through to help you make an informed decision. It will also allow you to learn more about some of the most commonly used life insurance plans.

Once you have your report, you can then use our online quotation system to find some of the most competitively priced life insurance plans from a selection of major UK life insurance providers. Once you have found the right plan for you, use our 'apply online' facility.

We understand there can be a lot to think about when you are shopping around for the right life insurance policy, so we've put together a quick checklist.

You can simply print it off and keep it with you as a cheat sheet - to make sure you have the answers to all the right questions before you buy!

Printable checklist
  • Have you properly calculated how much cover you need?
  • Have you properly calculated how long you need cover in place for?
  • Have you taken account of any existing life assurance plans when working out how much cover you need?
  • Have you reviewed the cost of any existing plans, to see if you can get the same level of cover at a lower cost now?
  • Have you considered 2 single life plans instead of 1 joint plan if you are covering your own and your partners life?
  • Have you received more than one quote for the amount of cover you need from a number of different providers?
  • Have you established whether the premiums quoted for the life assurance plan you need are guaranteed or reviewable?
  • Have you considered whether or not the benefits payable in the event of death need to increase with inflation?
  • Have you considered critical illness cover to go alongside the life assurance plan you are researching?
  • Have you received and read the "personal illustration" document to review before committing to a new policy?
  • Have you received and read the "Key Features" document to review before committing to a new policy?

If you are researching life insurance for a mortgage -


  • Have you considered whether it is level term assurance or decreasing term assurance that you need?
  • Have you considered the maximum mortgage interest rate for each decreasing term assurance plan you have quotes for?
  • Have you checked to see if the provider of your chosen plan offers a 'free cover' period whilst they are underwriting?

This does seem a lot to think about but we would recommend that this is the minimum for you to consider to ensure that you make the right decisions when thinking about your life insurance needs. If you would some help, our independent financial advisers are available for you to speak to either over the phone or face to face.

Alternatively, our interactive online research tool, the Finance Navigator will provide answers to all of the questions above.

Based on the answers you give to a number of targeted questions, the Life Insurance Finance Navigator will help you to establish your own life insurance needs. It will then produce a bespoke guidance report for you to read through to help you make an informed decision. It will also allow you to learn more about some of the most commonly used life insurance plans.

Once you have your report, you can then use our online quotation system to find some of the most competitively priced life insurance plans from a selection of major UK life insurance providers. Once you have found the right plan for you, use our 'apply online' facility.

Based on the answers you give to a number of targeted questions, the Life Insurance Finance Navigator, a life insurance calculator, will help you to establish your own life insurance needs.

It will then produce a personalised written report for you to read through that will help you to learn more about some of the most commonly used life insurance plans so that you can make an informed decision about the best life insurance solution for you.

Whilst age is an important factor for establishing the cost of life insurance policies, they are normally available to people between the ages of 18 and 75.

Age is an important detail when underwriters come to decide on the premium they are likely to charge as it helps them to calculate the risk of whether or not they may have to pay out the policy benefits prior to the plans end date.

It's worth remembering that whilst your age might not stop you finding a life insurance policy, the older you are when you take the policy out, the higher the premiums you should expect to pay. If you are considering a life insurance plan for inheritance tax purposes, you should not leave it to late as the cost may make it to expensive to put a whole of life plan in place.

When people start researching their life insurance options it's normally the amount of cover and the cost of the plan that tends to preoccupy them over and above anything else.

However, another important consideration is how the benefits of a life insurance payment might be be made in the event of a claim. Complications are the last thing a family member would want to have to deal with while they grieve.

On the death of a policyholder, the beneficiary of a life insurance policy will normally be asked to provide various items of paperwork when submitting a claim for payment. These usually include an original death certificate and proof of policy documents.

If the policy has been written in trust, then the payout can normally be made very quickly. However, in the event that the policy is not written in trust, the payout will only be made on production of the Grant of Probate, which may take some weeks or even months.

While it might seem unnecessarily morbid, it's worth checking with your provider what documentation would be required and when. This could prevent any unwanted hold up in accessing the money.

It's almost impossible to put a fixed price on life insurance because it depends on so many factors.

While most companies will offer similar policies there is so much range within these that the only sure way to know how much life insurance will cost you is to get a quote.

The main factors that affect the cost of a life insurance plan include -

  • type of policy
  • length of the policy term
  • the amount of money you would wish to be payable (size of the death benefit)
  • flexibility of the policy
  • number of people covered

Other more personal details that affect cost are -

  • your age
  • your state of health
  • whether or not you smoke
  • what you do for a living

Most providers will also want to know about your family, in particular if there's a history of cancer or hereditary diseases for example.

If you are concerned about your own or your family's medical history and feel that it may be a detrimental factor when underwriters calculate the cost of the life insurance plan you wish to take out, you may be better off applying to a number of providers at the same time to ensure that you get the best possible price for the cover you require.

An important part of getting the right life insurance plan is to use a good decision making process.

Most people set up life insurance policies to provide at least enough money to pay any off outstanding debts such as a mortgage or loan that would otherwise be left outstanding at the date of their death. Many people also then choose to provide extra funds on top of that basic amount to ensure that there is enough money to see their children through school and then university if necessary. This helps to ensure that their family is not left to struggle financially in the event of an unexpected death.

The first step to establish how much cover you need is to decide exactly what the money it would provide would be used. This is best done by asking yourself a selection of questions.

Life insurance to protect your family -

Will your entire mortgage debt be paid off?
Would you leave behind debts other than your mortgage that would need paying off?
How much financial support would your family need after you die?
How much net income would your partner need to ensure that they can maintain a reasonable standard of living?
Will you need to make extra provision for your children's private or university education?

Life insurance to protect a business partner -

How would your business partner fair financially after the upheaval caused by your death?
How much business debt would currently be outstanding at the date of your death?
How much capital would be required in the short term to take account of the reduction in profits that your death might cause?
How much capital might be required for the recruitment costs of an individual capable of completing the work you used to do for the business?
How much capital might be required to cover the first 6 to 12 months wage of that individual whilst they settle in to their new role?
How much would you expect your business partner to pay your beneficiaries to effectively buy out your share of the business?

Once you have had chance to consider all of the above you will be in a far better position to work out exactly what level of life insurance you might need.

Until you have a good idea of how much your dependants or a business partner would need, it's difficult to know if you will be getting quotes for the right amount of life insurance most relevant to your actual needs.

Many people are concerned that the time and money they invest in a life insurance policy would be wasted if they were unable to meet their premium payments. They would have nothing to show for their money and they wouldn't have the protection they wanted either. However, this needn't be a worry.

Of course if you continually miss payments with no just reason then your policy will lapse. But most companies will offer you something called waiver of premium (sometimes known as premium protection). With this, if you're unable to pay your premiums after suffering a long term illness or disability the insurance company effectively waives the need for you to continue to pay the premiums.

There is usually a waiting period before a claim can be made, referred to as the 'deferred period', which is often about six months.

The underwriting - the decision on how much to charge you for your premium - is usually stricter on this than life cover and they are likely to investigate your occupation as well as your health. But usually any additional cost for waiver of premium is relatively small.

A common concern for those taking out life insurance policies is the affect inflation can have on the real value of the payout their family might receive in the event of their death. While the amount payable can seem like a healthy sum today, ten years from now you might find that the amount payable in real terms to your dependants then may not be enough for them to pay off all of their debts then or maintain their standard of living.

Fortunately there is a way of helping to prevent inflation eating away at the benefits payable from a life insurance policy over the term of the plan and it is called indexation.

Indexation is a facility offered by many life insurance providers and allows you to maintain the buying power of the potential benefits payable.

With indexation, normally the premiums (and therefore the benefits payable) are linked to one of the indicators of inflation - these are usually the Retail Price Index (RPI), or the Average Earnings Index (AEI). This means the value of your policy increases in line with inflation each year so the buying power of the money should maintain their value in real money terms how ever far in the future death occurs.

You will usually need to opt to add indexation at the start of your policy and it is important to be aware of this when you apply for your life insurance plan as it is not common practice for providers to allow you to add indexation to your plan at a later date.

The good news is that if you can include it from the outset, if the amount payable grows to much and the cost of the premiums are becoming a concern, it is not normally to difficult to cancel this added benefit at a later date if you decide that it's no longer necessary and you want to save some money.

As you progress through life it's a near certainty your life insurance needs will change.

Your dependants will grow up and become financially independent and your concerns might switch to inheritance planning or providing for your partner after your death in retirement.

This doesn't mean you have to lose the value of any existing policies.

Some life insurance plans can be set up with the option to convert to a 'whole of life plan' or an 'endowment' for the same sum assured without having to provide further details. This is especially likely to benefit you if your health has deteriorated during your life as the insurance company will not request new information.

There is usually a small additional cost involved if you want to retain his option but if you believe you would see value from it the cost could appear negligible.

Most life insurance policies will pay out on death regardless of how you die, as long as there are no discrepancies in the medical information you submitted to the life insurance company when you set the policy up. However, there are some policies that only pay out in the event of your death being the result of an accident.

These 'accidental death' policies can seem to be quite cheap and are normally sold by banks and building societies. Sometimes they are even provided free for the first few months as a 'reward' for setting up a new account or credit card. After the first few months, you will normally be expected to pay the premium yourself and because these plans provide very restricted cover and the premiums are often quite small, many people do just that, sometimes without even realising it.

However, these are not full blown life insurance plans as they will only pay out the full sum assured if you die as a result of an accident and not natural causes such as a heart attack or cancer. For this reason you are likely to be better off investigating a more comprehensive life insurance plan instead of a restricted 'accidental death' policy.

Some normal life insurance plans offer an additional sum assured that can be taken out to cover accidental death where the amount payable is increased because of the fact that the person covered died as a result of an accident. However, this is probably not a reason to chose one policy over another as the important thing is to make sure that the person whose life is being covered has the correct amount in place, regardless of the way the way they die!

Your life insurance policy can protect you but it can't cover every eventuality.

If you're concerned about how your family would cope if you were to die prematurely then you're probably keen to ensure they would be protected in the event of income lost to a serious or life-threatening illness.

Insurance companies make provision for this eventuality through a product called critical illness cover. This is available a as a stand-alone plan or as a cover option on life insurance plans.

Similar to a life insurance policy, a sum of money is paid out to cover your own and family's living costs in the event you are diagnosed with one of a specific list of serious or critical illnesses. Critical illness plans normally provide a lump sum after the person insured has survived a specific amount of time after being officially diagnosed, often 28 days or more later.

It's worth remembering that most stand alone critical illness plans are set up so the plan expires and there is no value left to claim on if you then die from the illness. Due to this restriction, you may like to consider a 'death or earlier critical illness' plan instead. In some cases this plans can even be cheaper than critical illness only plans as the market for them is more competitive than the critical illness only plans.

A wide rage of illnesses are usually covered by critical illness cover providers. To see a comprehensive list of critical illnesses commonly covered and for more detail on protecting your lifestyle against the possibility of being diagnosed with a serious critical illness please see our dedicated critical illness fact centre.

If you're interested in researching critical illness insurance plans further, you should speak to an independent financial adviser. Alternatively, you can use our interactive online research tool, the Finance Navigator. Based on the answers you give to a number of targeted questions, the Critical Illness Finance Navigator will help you to establish your own critical illness cover needs. It will then produce a bespoke guidance report for you to read through to help you make an informed decision. It will also allow you to learn more about some of the most commonly used critical illness plans.

Once you have your report, you can then use our online quotation system to find some of the most competitively priced critical illness plans from a selection of major UK critical illness plan providers. Once you have found the right plan for you, use our 'apply online' facility.

Once you've decided what you need from your cover and for how much, the next stage is to choose what type of cover you need.

The first thing to know if you're considering protecting your family and lifestyle with a life insurance policy is the type of cover that will suit your needs depends entirely on your personal circumstances.

The types of policy used for providing protection for your family are usually term life insurance, family income benefit and whole of life insurance plans.

Term life insurance is a standard form of life insurance used for providing a lump sum in the event the life-insured dies prematurely.

If you intend to provide a replacement for lost income then Family Income Benefit could be a more suitable alternative. Rather than simply providing you with lump sum this pays a regular income amount to help replace the loss of a loved ones wages.

If you looking at a life insurance policy as a way of covering a variety of needs then a whole of life insurance may be suitable for you. As always there are a variety of variations on the main theme, but as the title suggests this kind of policy would run through until your passing away.

As we've already suggested, once you've decided what you need the cover for, the next stage is to decide how much you need. You can then seriously start considering the options available to you.

The amount you require will depend on your personal circumstances and how much you would want to be available to your family.

The best way to home in on the figure you need is to ask yourself a series of questions.

  • Firstly, how much would your partner and/or dependants need to survive?
  • How long would this money need to last for?
  • Would the money need to pay off any debts before it starts to benefit your family?
  • How much do you and your family already have as savings and investments?
  • Could you rely on an income from this?

You shouldn't forget to take practicalities into consideration such as how much can you reasonably afford to pay towards a policy each month. This should be a balance between ensuring the cover you need is in place and leaving enough disposable income for enjoying life - after all the best outcome is a claim never needs to be made on life insurance.

  • Do you have any existing life assurance policies?
  • Is this designed to replace or complement them?

You should be clear on your current policy position before you start to make sure you're not paying out unnecessarily.

Imagine you're 28 and married -

You have two children, aged two and four. Your partner doesn't work as they spend their time caring for the children. You have a mortgage in joint names, which is covered by a separate life insurance policy.

You become concerned that if you died prematurely your family wouldn't be able to survive without your lost income.

You and your partner decide the most important period to have the right levels of life insurance for each of you in place is when if either of you passed away your family would struggle financially - this could be until your youngest child is financially independent.

If this age is taken to be 21 then it's 19 years until your youngest reaches that age. This means your policy should be set up for at least 19 years, and possibly even a little longer to provide a small buffer zone.

If you are considering protecting your outstanding mortgage debt with a life insurance policy, the first thing you need to know is what type of mortgage you have as this will determine what type of plan is most suitable to your needs.

You need to make sure your life insurance policy and mortgage match, otherwise you risk undermining your cover.

If you're repaying both the capital and interest on a loan every month you have what's called a 'repayment mortgage'. With this type of mortgage, by the time you finish repayments you will have repaid all the money you borrowed, with interest.

For repayment mortgages you would usually use a decreasing term assurance plan. The amount payable on death from this type of plan decreases every year in line with the decreasing amount you owe to the bank.

If you repay just the interest on your outstanding mortgage debt then you have what's called an, 'interest only mortgage'. Because you don't pay back the money you borrowed for your house until the end of your mortgage repayment term, you would usually have an investment savings plan designed to accumulate sufficient capital to repay the loan at the end.

For interest only mortgages you would normally use a level term life insurance plan. The amount payable on death from this type of plan never decreases. This is because you will always need to pay back all of the money you originally borrowed from the mortgage provider at the outset.

With both policies, the life insurance plans aim to cover the full repayment of your mortgage in the event of you dying prematurely. When they come to the end of the term that you set them up for in the first place, they expire without value.

If you want to provide extra financial security you usually have the option of adding features to your policy. These typically include critical illness cover, and terminal illness benefit.

More about life insurance for mortgages

If you are interested in researching life insurance plans for mortgages further you should speak to an independent financial adviser.

Alternatively, you can use our interactive online research tool, the Finance Navigator. Based on the answers you give to a number of targeted questions, the Mortgage Protection Finance Navigator will help you to establish your own life insurance needs. It will then produce a bespoke guidance report for you to read through to help you make an informed decision. It will also allow you to learn more about some of the most commonly used life insurance plans.

Once you have your report, you can then use our online quotation system to find some of the most competitively priced life insurance plans from a selection of major UK life insurance providers. Once you have found the right plan for you, use our 'apply online' facility.

Life insurance policies aren't just the concern of families and parents with young children.

Apart from the more obvious aims of protecting your family and the home they live in, a life insurance policy can be a useful way of protecting any inheritance you plan on leaving behind. And it's a popular option, as many people prefer to leave more to their heirs than to the Inland Revenue.

Your estate (your total financial wealth) would normally have to be worth a certain amount before any inheritance tax (IHT) might need to be paid - people with larger estates (in excess of £325,000 for individuals or £650,000 for married couples or partners in a civil partnership).

If you are married or partners in a civil partnership and were to leave all of your individually owned assets to each other, any inheritance tax liability is unlikely to be claimed until the second partner dies, after they have inherited extra wealth from the first partner that died.

Since October 2007, new rules mean that this is less of an IHT issue than it used to be, however, you may still be better to put life insurance plans in trust and to have them pay out directly to beneficiaries other than a spouse or civil partner, like children or grand children.

Often any resulting IHT tax bill will need to be paid before probate is granted. So your family could find themselves having to take out a loan before your assets can be sold to pay the outstanding IHT tax bill.

A life insurance policy could help your family by paying this tax bill on your death. Not only does this save the hassle of taking out a loan and paying unnecessary interest, it also covers the tax liability, leaving your heirs to enjoy the full value of whatever you gift to them.

It can be quite tricky to make this work properly because you need to set up a trust so the policy pay-out does not form part of the deceased's estate. Without doing this you would only increase the tax bill your family would need to pay.

The funds are paid to the trustee of the trust, who then passes them on to the beneficiary to meet the tax bill. If you have ensured the funds go into a trust, probate should not be a problem and the insurance company will usually pay an accepted death claim pretty quickly.

If you're considering life insurance to cover a future potential IHT liability, the most suitable policy is likely to be a 'whole of life' plan.

These plans will normally be set up inside a trust with the beneficiaries being named and the prospective heirs to your estate. It's encouraged you seek the help of a financial adviser for setting these sorts of plans up due to the fact that this area of financial planning is quite complex and you should seek independent advice from suitably qualified and specialist adviser, potentially one that has passed the advanced financial planning certificate.

If you are considering providing gifts of monetary value to your family or heirs to potentially reduce your estates future inheritance tax (IHT) liability, life insurance policies can be really helpful to protect the recipient of the gift from incurring a liability to inheritance tax on the gift you give to them.

For lifetime gifts to be completely free of an inheritance tax liability, the person who gave it must survive at least seven years from the date of making the gift. In some cases this may be even longer, dependent on the type and size of the gift and who the beneficiaries are.

A life insurance policy can help by providing funds to help pay towards the cost of the possible IHT liability that this sort of planning can create should the insured person die before the value of the gift has fallen outside of their estate.

This type of policy is called a gifts inter vivos plan and is designed specifically for this purpose. The sum insured reduces each year in line with the sliding tax scale. These plans will generally be set up in trust so the policy payout does not just get added to the value of your estate.

Inheritance tax-planning is a particularly complicated area, so it's strongly suggested you seek professional advice from an expert. Our independent financial advisers here at Money Minder have many years of experience dealing with this subject. Contact us now.

If you own or run your own business then you'll be aware how vital you are to its success.

So have you considered what would happen if you died prematurely - would it be able to carry on without you? Would you want your family to be preoccupied with work having just lost a loved one?

Life insurance policies can be effective in protecting the interests of your business.

These policies are usually intended to protect:

  • Shareholder directors
  • Partners in business
  • Key employees
  • Any business loans

Shareholder Directors

If there are five directors or less in your company, you may have a vested interest in your competitors getting their hands on shares in your business.

If a director shareholder died unexpectedly this could create the opportunity your competitors have been waiting for to get a hold on your company.

By setting up an agreement helps to direct what options are available to the surviving directors, this danger can be reduced significantly. You simply agree that the existing shareholders can have first refusal on your shares should you die. In addition, a life insurance policy is normally set-up alongside the agreement to provide the funds for the shareholders to buy your shares in the business.

Each shareholder or partner is seen to have an insurable interest in the other for these purposes.

The type of policy that would normally be used is a term life insurance plan. Each shareholder would take out a separate policy to cover the lives of the others.

Partners in Business

Partners in a business partnership could also find themselves in a similar situation, except it would be the partner's share, which could be in danger in the event you die prematurely. Establishing a special partnership scheme would help provide formal guidance and a connected life insurance plan would provide the funds for the surviving partners to buy out the deceased partners stake in the partnership.

Key Man life insurance

It may be that your business relies heavily on a key person. Perhaps they have a specialist skill or knowledge which would be difficult to replace in the event they were to die prematurely. If this is the case your business would have an insurable interest in this individual and so the business owners could take out a life insurance policy on their life. Once again a term life insurance policy would normally be set up for this purpose.

Some employers also offer a 'death in service' benefit.

Sometimes employers will set up a life insurance policy for the benefit of an one or more employees. The benefit payable from these plans is usually expressed as a multiple of the employee's salary. These arrangements can be for individuals as well as specific groups of employees.

Putting in these types of protection can prove invaluable, but they are also quite complicated and are usually part of a wider financial strategy.

As such it's strongly suggested you seek professional advice from a financial expert if you're considering any of these options. Our advisers can help you with all of the above subject areas.

The payout from a life insurance plan is normally tax free.

However, if the plan is not set up in trust, you should remember that any benefits paid are likely to form part of the deceased's estate, unless the money is being paid to a charity.

If the payout and the existing estate value nudges the estate over the threshold for paying no inheritance tax, then any amount over the threshold would be liable for inheritance tax. The long standing inheritance tax rules changed significantly in October 2007 and whilst potentially it is now less likely for married couples or civil partners with estates worth less than £624,000 to pay any inheritance tax, it is still an area that should be considered when setting up any life insurance plans of significant value.

If you are hoping to leave an inheritance to your family, it's likely that you'll want to pass on as little as possible to the taxman at the same time.

You can address this by opting to put your life insurance plans in Trust which can also help to ensure that the right people receive the correct money at the right time. This also helps to provide money to your beneficiaries quickly with out the need to wait for probate.

Placing a life insurance policy in Trust is a complex issue, and people considering this option should always seek advice from their solicitor and independent financial adviser before proceeding.

If you're concerned about getting life insurance in place as soon as possible should consult our experts at Money Minder for expert help and advice.

Establishing your own life insurance needs

It's extremely important you get to grips with the fine details of your policy so you understand exactly what your position is - after all this is where your peace of mind comes from.

This means understanding the terms and conditions of your life insurance policy.

It may be your personal circumstances change during the term of the policy - the current premiums or the eventual amount of the payment may no longer be appropriate.

Something that is guaranteed to change is the economy. A policy taken out 20 years previously might simply no longer cover all contingencies.

If you want to beat inflation you need to consider index-linked policies. The guaranteed payout and the premium payable of these are linked to the Retail Price Index, rising alongside it each year.

If you're considering an index-linked policy you need to establish whether the policy is linked automatically, or whether you need to opt-in to linkage each year; failure to do so could result in being locked out of future linking.

You should also be aware of all the rules and regulations surrounding a payout from your policy. Some policies may not, for example, pay out if death is caused by participation in certain dangerous sports or activities, but you can sometimes get policy add-ons to cover this eventuality.

If you receive life insurance as part of an occupational pension scheme you need to be sure the cover is maintained if and when you leave that company. If the policy is not maintained, a new one should be started as soon as possible and you should be aware there could be a period when you have no cover in place.

It is also important to remember that the longer you put off getting life insurance, the more expensive it will get.

If you're concerned about getting life insurance in place as soon as possible should consult our experts at Money Minder for expert help and advice.

Alternatively you can assess life insurance options specific to your circumstances by using our online personal finance consultant, the Finance Navigator. This helps you produce a bespoke guidance report and allows you to investigate the policies available online.

It is fairly simple to apply for a life insurance policy and once you know what you need you can use our online application facility to benefit from the exceptionally competitive prices for life insurance that are available via this site.

However, life insurance companies are in the business of assessing risk and as such the assessments that can be involved at the underwriting process before a life insurance company decides to offer you cover can be long winded.

Insurance companies use what they call mortality tables to determine the premium for a particular individual. These tables assess the chances of a person dying within the term of a policy, based on factors such as their age, sex, occupation, smoker/non-smoker status and so on.

Mortality tables will be used to assess the premium for a person in normal health. To these premiums the insurance company may then add a 'loading', after taking into account many factors relating to medical history and lifestyle.

If you're asked to provide any personal information it's crucial you disclose the truth about your health and any conditions you may suffer from to the insurer. If you don't do this, your life insurance policy could be rendered null and void upon your death - your family wouldn't have any of the protection you believed you'd been paying for.

To get the application process started, you can review your own life insurance needs specifically according to your circumstances by using our online personal financial planning research tool, the Finance Navigator.

Establishing your own life insurance needs

This is the name of the process used by an insurance company to assess the risk posed to them of a particular event occurring, which in turn, may mean that they may have to pay a claim on a policy that they have provided to a 3rd party.

For life insurance plans, cancel you have completed an application form, your request for cover is assessed against the companies perceived risk and appropriate premium rates are calculated.

Some insurance companies now employ the services of qualified doctors and nurses to interpret reports and medicals from GP's and to help determine the amount of any premium loading.

Some now even employ qualified medical staff to work in their medical underwriting telephone call centres. Their specific role is to make contact with the proposed life assured to confidentially discuss their medical history with them before premiums rates are confirmed.

Once the underwriters have assessed an application, terms may be offered and the cost of the plan will be confirmed. In many cases this will be the price originally quoted and normal rates will apply.

However, in some cases a loading may be applied. This has the effect of increasing the cost of the plan and in some more serious cases the underwriter may refuse to offer cover at any price. For those people offered cover on special terms, the provider is openly stating that they think that the risk of a claim is actually higher than average. As such this makes cover potentially even more important to have in place.

  1. The person entitled to the policy should first inform the life insurance company.
  2. They will then send a claim form to the claimant for completion.
  3. Usually the claimant needs to return the form to the insurance company with the original death certificate and the policy document.
  4. Sometimes a birth certificate will also be required.
  5. When the claim has been approved by the insurance company they will payout.
  6. If the policy was set up in joint names this will be the survivor.
  7. If it's a single 'own life' policy, it will be the executors of the deceased's estate that will make the claim.
  8. In the absence of a Will, the funds will be paid to the person entitled under the laws of intestacy.
  9. If the policy was set up under a Trust, the proceeds will be paid to the Trustees so that they can be passed on to the beneficiaries in accordance with the rules of the Trust.
  10. If the policy was set up as a "life of another" plan then the named owner of the policy will be entitled to the funds.

Life insurance is so important that some mortgage lenders have been known to make people take out plans as part of their mortgage agreement. This is so they can be sure that in the event of the borrowers death, the outstanding mortgage debt will be repaid. This is a very good idea and will help to ensure that your family can remain in their own home in the event of your death. In many cases, they will then own the house outright.

If you want to put life insurance in place to protect the outstanding debt on your family home, the type of policy you should consider will be dependent on the type of mortgage you have.

For interest only based mortgages a 'level term assurance' life insurance policy is likely to be most suitable. For repayment mortgages, a 'decreasing term assurance' policy is likely to be more suitable. Both plans offer fixed premiums over a fixed period of time and neither include a savings element to them which helps to keep them cheaper than their 'whole of life insurance' or 'endowment life insurance' counterparts.

If you are interested in researching life insurance plans for mortgages further you should speak to an independent financial adviser.

Alternatively, you can use our interactive online research tool, the Finance Navigator. Based on the answers you give to a number of targeted questions, the Mortgage Protection Finance Navigator will help you to establish your own life insurance needs. It will then produce a bespoke guidance report for you to read through to help you make an informed decision. It will also allow you to learn more about some of the most commonly used life insurance plans.

Once you have your report, you can then use our online quotation system to find some of the most competitively priced life insurance plans from a selection of major UK life insurance providers. Once you have found the right plan for you, use our 'apply online' facility.

  • Your state of health at the time of application and prior to going on risk
  • The level of cover you require
  • Whether the sum insured is set up to be level over the term of the policy or whether it increases or decreases
  • Your age at the time your policy goes on risk
  • Whether you smoke or have used tobacco or nicotine substitute products in the last 12 months
  • Whether your policy is set up with guaranteed premiums or reviewable premiums
  • With some companies, your occupation may be taken in to account
  • If the policy is term insurance, the number of years it has to run
  • Whether you have waiver of premium on the policy and if so your occupation
  • Whether you engage in any hazardous sports
  • Whether you travel outside the UK other than for holidays on a frequent basis and to which parts of the world
  • Whether your parents died before the age of 65 from certain illnesses like cancer or stroke
  • For level term insurance whether you have chosen a conversion option

Glossary

Probate

The legal process by which a will is proved, executors are appointed and an estate is settled; it is also understood as the legal process whereby a dead person's estate is administered, debts are paid and assets distributed in accordance with the deceased's instructions.

Insurable interest

The fact that the person setting up the insurance plan will suffer a financial loss on the death of the person to be insured. For a policy to be allowed on a 'life of another' basis, the owner/proposer of the plan must have an insurable interest in the person whose life is to be insured.

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