Life Cover: FAQS

Life cover is a very important policy that pays out a tax-free lump sum or regular payments in the event of your death or being diagnosed with a terminal illness while covered by the policy (provided your life expectancy is less than 12 months). Terminal Illness Benefit is an additional benefit that most insurers add to life cover for free. As a breadwinner, it’s designed to provide you with the reassurance that your dependents will be financially covered after you are gone and you’re no longer there to provide for them. The amount of money paid out on claim depends on the level of cover you buy. Click here to Read More

YES! Buying life cover is buying peace of mind. If you have financial dependents and/or financial commitments like a mortgage, then you definitely need life cover.

It’s a fact that tomorrow is not guaranteed to anyone and globally an average of 165,000 people die every day and that is an average of 2 deaths per second. God forbid something was to happen to you; what would happen to your loved ones, your financial dependents like your children, your family, your parents? Who will pay the mortgages or the rent? What about food, clothing, bills, education and other daily living expenses if you are the breadwinner?

THINK! To have no life cover when you are the breadwinner for your family is simply carelessness, it’s literally irresponsible. May be, you don’t realise that generally a mortgage is repayable when the homeowner dies. If there is no life cover and your surviving family cannot payoff the mortgage then the lender will simply take the house and sell it to recover their money, pilling more misery on your grieved family. Don’t leave you loved ones a legacy of tears and financial misery. Leave them happy memories and peace of mind by taking a life cover and a funeral cash plan.

Everyone is different and people tend to have unique needs even when it comes to life insurance but there are basic ‘rules of thumb’ when it comes to deciding on the cover amount and what should influence your decision.

The amount of cover therefore largely depends on what you need the life cover for to begin with. Is it to protect your financial dependents, protect your debts like mortgage, to just leave a lump sum for your loved ones or pay off inheritance tax?

Financial dependents: This is when as a breadwinner, you are taking term life insurance for income replacement in the event you die whilst they are still financially dependent on your income. Are you a parent or breadwinner? If so, how many children or dependents you have? Having spouse, children, parents or relatives who are financially dependent on you is a big factor only in making the need for life insurance urgent but also how much?

The age of your financial dependents especially children is a very crucial factor. The younger the dependents the longer they need you as a breadwinner and also the higher the amount needed.

Your age as the breadwinner also matters. How many years do you have before retirement? Will you still be having financial dependents in retirement and if so for how long and up to what age does the insurer allow your life insurance to go to? Other things permitting the key guide is to match the period when are going to have financial dependents and the term of the life insurance. The ideal life cover for financial dependents is a level life insurance.

Debt redemption: This comes into play when the main purpose of you taking a life insurance is to pay off debts like your mortgage in the event of you dying before it’s paid off. In such situations the key consideration should be the term of the debt and if mortgage, whether its repayment or interest only. Mortgage Protection Insurance is a form of life insurance that is designed and matched to redeem a mortgage balance should you before it’s paid off. Repayment mortgage goes with decreasing life insurance and interest only mortgage with level life insurance as the exposure is not reducing over the loan term.

Lump sum inheritance gift or inheritance tax bill settlement: This is one of the key motivating factors why you need life insurance or life assurance to start with. If the drive is to live your loved ones a lump sum as part of their inheritance or to get a tax-free lump sum on death which will be used to pay off inheritance tax bill then the best cover is a life assurance or whole of life assurance.

Other key universal considerations include things like your lifestyle, savings and affordability.

Your lifestyle will also affect your premiums. As an example, smokers or people who drink a lot of alcohol will pay more for their life insurance as they are deemed to be higher risk, due to possible ill health.

If you got substantial savings relative to your exposure or risk, you want covered then that could also affect not only how much life cover you need but whether you really need life cover at all.

Affordability is a key consideration. How much you can actually afford to pay for your life insurance in monthly premiums. Life cover is so important and its always a great move to sacrifice a bit of your disposable income to protect your loved ones and have some peace of mind.

If you have financial dependants be it children, partner, elderly parents or other relatives depend on your income, you have debts like a mortgage, or you are likely to have inheritance tax bill in the event of your death then YES you should have a life cover.

Life Cover for income replacement: Life cover proceeds can be used as income replacement if a breadwinner is deceased leaving people financially dependent on you exposed and unable to pay for things like the mortgage or rent and other daily living expenses. If you have financial dependents especially children you need life cover.

Life Cover for debt redemption: Life cover proceeds can also be used to redeem any debts the deceased may have like a mortgage, car loan or any other personal loans. Failure to completely redeem or maintain monthly mortgage payments means that your family faces eviction. The house will be repossessed and sold to pay off the mortgage.  Any other unsettled debts will be part of the deceased’s estate and will need to be paid before any money is made available to the beneficiaries.

Life Cover for inheritance tax: If you are rich and likely to be affected by inheritance tax then it means a huge part of your estate will be going to the taxman. If you want your beneficiaries to inherit your full estate, then its best you take a whole of life cover proceeds of which will pay off the tax bill leaving your beneficiaries to inherit 100% of your estate. 

The amount of money paid out on claim on a life cover depends on the level of cover you buy.

There are mainly two types of life cover: Term Life Insurance & Whole Of Life Assurance. 

The cover amount largely depends on what you need the life cover for in the first place. Is it to protect your financial dependents, protect your debts like mortgage, to just leave a lump sum for your loved ones or pay off inheritance tax?

Financial dependents protection: quite a few factors to consider here although as a simple guide a reasonable amount for life insurance should be 10 to 20 times your annually salary. The idea is that the lump sum should not be immediately used to cover daily living expenses. Instead, it should be used to generate zero-risk income to cover living expenses especially where the dependents are still young. The lump sum would then be used in future to cover large expenses like university fees, wedding costs the like.

Alternatively, you can multiply your annual salary by the number of years left until retirement or by the average number of years left before dependents are financially independent.

It is always important to consider how much money the dependents you leave behind will need and for how long. It’s about income replacement and also factor time value of money.

Dept redemption protection: always try to match the term of the debt to the term of the life insurance. Also make sure to match the debt amount to the life insurance cover amount and if the debt is repayment like a repayment or capital and interest mortgage then you can match it with a decreasing life insurance. If the debt level is like an interest only mortgage, then ideally match it with a level life insurance.

Lump sum inheritance gift or inheritance tax bill settlement: If your motivation is to simply leave a lump sum for your loved ones or redeem inheritance tax bill then the amount of cover can be based on that. To achieve that, you would need a whole of life assurance not a term life insurance that may expire before you die.

There are basically two types of premiums: Guaranteed Premium and Reviewable Premium.

Guaranteed premium means that the policy premium remains the same throughout the policy term which makes guaranteed premiums more expensive than reviewable premiums but comes with certainty of premium payments.

Reviewable premiums means that the premiums are to be reviewed periodically, typically every year or five yearly, meaning that premiums can increase following a review. A reviewable premium may start cheaper than a guaranteed premium but would be more expensive, if not, unaffordable in the long run.

Premiums will depend on factors like sum to be insured, period of insurance cover, occupation, your age, family and personal medical history, your lifestyle, for example, whether you smoke or not amongst other factors like too much alcohol consumption. A non-smoker is usually defined as someone who has not smoked for at least twelve months.

Waiver of Premium is an optional premium payment protection cover which is offered as part of an insurance policy. Adding a Premium Waiver increases the overall premium payable. In the event of injury or illness you may fail to pay the premium on your policy which means it will lapse. If waiver of premium is added on to your policy, then your monthly premiums are paid on your behalf for a given period after a set deferment period. For example, if you get 3 months’ sick leave pay, then your Waiver of Premium benefit can have a deferral period of 3 months. The longer the deferral period the cheaper the Waiver of Premium.

Terminal Illness Cover is an additional benefit added at no extra cost to life insurance policies like level life insurance or decreasing life insurance where a lump sum cover amount is paid out early on diagnosis of a terminal illness. This allows you to make arrangements for your dependents whilst you are still alive or to use some of the money on making your last days as comfortable as is possible.

A terminal illness is defined as one that has no known cure or has progressed to a point where it cannot be cured, and in the opinion of your hospital consultant and our Medical Officer (a qualified doctor employed by Legal & General), it’s expected to lead to death within 12 months.

Once a terminal illness benefit is paid the policy ends and no terminal illness benefit can be claim after death.

NO, they vary from one provider to the other. It is important that you read the provider’s Key Facts document before taking out the policy especially if you are applying for Critical Illness Cover, Income Protection Cover, Private Medical Insurance which are polices that come with different terms and exclusions. Life cover tends to be generic and similar, and most insurers add Terminal Illness Benefit for no additional cost.

Insurances are based on the principle of UTMOST GOOD FAITH which means that the person who is offering the risk to an insurer is obliged to make a complete disclosure of all material facts that would affect the insurers’ appreciation of the risk. You have to tell the truth on application.

Non-disclosure means not revealing certain aspects concerning your health in the application — or has made a false claim — and so the insurer declines the claim. There is no more expensive policy than one that does not payout in the end. The main reason why most policies do not pay is non-disclosure.

Always complete any insurance application honestly as failure to do so will result in the insurer refusing to pay. You are better off paying a slightly higher premium on a policy that would payout than a slightly cheaper premium on a policy that would not payout and spell a disaster for your loved ones. Medicals are sometimes required (paid for by the insurer), in some circumstances a report may be required from your doctor before you term life insurance policy is accepted.

Life cover can be taken as:

Single Life Cover – Pays out a pre-defined tax-free lump sum upon death of the life covered.
Joint Life Cover – this when the life cover policy is jointly covering two lives normally a couple. The qualifies to whether it pays out on first or second death.

Joint Life First Death – will pay out a pre-defined tax-free lump sum upon the death of either of those names listed on the policy. The payout is made to the remaining partner and then the policy ends.

Joint Life Second Death – Pays out once on death of the second policyholder and the policy ends. This option is normally taken for inheritance tax planning. 

In many cases, couples arrange the cover on a joint life first death basis. It may well be worthwhile to consider taking your policies as two separate single life policies:

• Death & Joint Life Covers – Upon death of one of the policyholders, the policy pays out but leaves the surviving partner without any life cover. If they were two single policies, then the deceased partner’s policy would pay out and surviving partner’s policy would remain in force and unaffected. 

The fact that upon one policyholder’s death, the policy pays out and lapses creates a problem; if, as is generally the case, the need for life cover continues to exist. The surviving partner will need to take a new cover. Age factor and changes in medical condition may mean that the new cover is a lot more expensive if not unaffordable. New medical conditions may mean that the survived partner or spouse does not qualify anymore.  With two single policies, this would not be an issue as the surviving partner’s policy would remain in force.

• Two Payouts – joint life cover would only pay out once whereas two single policies would pay out twice.
• Divorce & Joint Life Cover: Unfortunately, relationships breakdown, 4 in ten marriages do end in divorce and an even higher figure than that of ordinary relationships do end in permanent separation. When this happens assets and belongings need to be divided and split, unfortunately, you cannot split policies. If the policy was taken jointly, it means cancelling it.
• Two single life plans on the other hand you do not need splitting as they are by definition already two independent plans so each part can just continue with own policy.
  
• Premium Comparison for Joint or Two Separate Policies – It is a common assumption that two single life covers are much more expensive that one joint one. This is far from the truth, arranging two separate plans over one joint one can only cost about 10% more on the overall premium. If you consider the benefits of two separate policies especially the two payouts you realise that you are better off with two single life covers.

• ‘…I Don’t Have A Mortgage…’ – The very core purpose of life cover is not to protect the mortgage lender; it’s to protect your loved ones. Life cover is only linked to a mortgage in situations where the breadwinner has a mortgage and the policy payout is used to redeem the mortgage in the event of death. Otherwise, mortgage or no mortgage, life cover is important as a form of income replacement if you as the breadwinner were to suffer a premature death. Your financial dependents would still need to pay rent, bills, food, and clothing amongst other daily living expenses.

• ‘…I Am Still Young…’ – Fair enough, the need for cover becomes more pronounced with age when you start to have financial commitments and dependents. But as the saying goes, tomorrow is not guaranteed to anyone irrespective of age. Also, it important to note that cover is a lot cheaper if taken at a young age. If you suffer an accident or critical illness which needs specialist treatment outside NHS how do you pay? Consider taking Critical Illness Cover. If you become incapacitated how would you get income to sustain yourself? Consider Income Protection Cover.

• ‘…I Already Have Got Cover…’ – Very critical with any insurance is whether it’s adequate and/or correct. Its always a problem if your plan does not adequately cover your commitments or exposure. Some people have ten-year life covers protecting them against a 25-year mortgage. Some have a decreasing life cover protecting them against level commitments like interest only mortgage, some have life covers which are only 2 times their annual salary when it’s recommended to have at least 10 to 20 times your annual salary worth of life cover, some have 10-year life cover yet they are still child bearing or could still be having very young children. Incidents of such mismatches are innumerable, and the effect can be disastrous. It is important to make sure that your cover adequately protects you and your loved ones. 

• ‘…My Employer Provides…’ – Good old excuse but remember employer cover is as good as the employment goes and in most cases employer cover is rarely above 4 times your annual salary. This is hardly adequate.

• ‘…I Have A Very Supportive Family…’ – In as much as they may want to help, realty is that they have to deal with their own needs first and may not afford the extra financial burden.

• ‘…The State Will Take Care…’ – Social services is a last option. The reality is that state support will never be enough to maintain your family’s lifestyle. 

• ‘…I Will Take Later – STOP PROCRASTINATING…’ – With insurance there is no tomorrow, unless you a superman who won’t die or you know when you will die. Do the responsible thing; if you love them GET COVERED NOW! Like they say, ‘…insurance makes sense to widows and widowers…’, maybe a second too late. 

• ‘…The Insurer Will Not Pay…’ – This is one of the biggest untruths out there. A record 98.3% of protection claims were paid out in 2019. Figures from the Association of British Insurers (ABI) and Group Risk Development (GRiD) show that the insurance industry paid out more than £5.7 billion in protection claims in 2019 – a year on year increase of over £470 million on 2018 settlements. Pay outs equal £15.8 million paid every single day.

The small percentage that is not paid out is largely due to non-disclosure. When applying for life cover, declare all the truth even if it means paying a slightly more expensive premium and the insurer will have no reason not to pay out. It’s better to pay a higher premium on a policy that would pay on claim than a small premium on a policy that would be repudiated or rejected on claim.

• ‘…I Am A Foreign National – The Insurer Will Not Pay…’ – This is a misconception. As long as you are a resident you are entitled to life insurance. Some insurance companies also provide international cover where the life insurance is issued irrespective on citizenship and country of residence.

• ‘…It’s Too Expensive…’ – This a serious misconception, the cost of life cover has dropped by over 70% in the last 30 years. To say life insurance is too expensive is as bad as arguing that ‘my life is too cheap and not worth insuring’. 

• ‘…No Family History Of Serious Illness Or Premature Deaths…’ – Lucky you! Maybe accidents, premature death and serious illnesses only happen next door, but to God next door could be your door. 

There are four reasons for the protection gap:

• ostrich syndrome – people simply don’t want to think about dying or falling ill, 
• confusion over the appropriate cover, 
• mistrust of financial professionals, and 
• expensive – people wrongly see cover as costly.
• Victims of Common Excuses 

A considerable number of people appreciate the need for insurance cover but suffer from procrastination disease; insurance cover is a permanent feature on the to-do list. It will be done tomorrow, unfortunately tomorrow never comes. Indeed insurance makes sense to widows and widowers, maybe a second too late. 

For a number of reasons, writing your life cover in trust is the best thing you can do for your beneficiaries. Setting up a trust ensures that money is passed directly to your beneficiaries, keeping it outside of your estate and without reference to your will or the taxman. There will be no need to apply for probate so the process of getting the money to your beneficiaries will be significantly decreased, by on average about six months.

In addition, setting up a policy in Trust will ensure that the money is not subject to Inheritance Tax.