Life is unpredictable, so we should make sure our family is adequately provided for, should things happen to us.
It is essential to have the the right life insurance in place. As we already know, you can’t always rely on being there for those who depend on you. There are various ways of providing for your family in the event of your premature death, and term insurance policies are just one way.
Level term life insurance offers the same pay-out throughout the life of the policy, so your dependents would receive the same amount – whether you died on the first day after taking out the policy or the day before it expired. Level term insurance premiums can be fixed for the duration of the term and a payment will only be made if a death occurs during this period of cover. This type of insurance is taken out for a fixed term and can also be useful for providing security to dependents up to a certain age.
Benefits of level term life assurance
- If you want to leave a cash sum to your family and dependents after you have died, level cover life insurance could be right for you.
- Level term life insurance is one of the most cost-effective types of life assurance that provide high benefit amounts.
- It provides certainty as both the cover and premiums are fixed.
Disadvantages of level term life assurance
- There’s no investment element with this form of life insurance, so if no claim is made, you won’t get any money back at the end of the term
- Level is usually more expensive than decreasing cover
- It won’t keep up with inflation and will buy less in the future
Level Term Critical Illness
Level term critical illness is designated to cover a specified range of critical illnesses and will pay out a lump sum if you are diagnosed with a serious illness during the policy term. The sum insured remains constant throughout the term of the policy.
Critical Illness Insurance provides financial assistance to help you cope with the impact of surviving a serious illness.
The definition of a serious or critical illness is one which is regarded by the medical profession as life threatening. Examples include heart attack, stroke, cancer, major organ transplant or kidney failure.
Benefits of level term critical illness
- It will be useful if you would like to protect yourself or your family financially if you are diagnosed with a critical illness
- It’s up to you how you spend the money
- Can be paid out as a lump sum or a monthly income
Disadvantages of level term critical illness
- Not all critical illnesses will be covered under the policy
- You are sometimes not covered for pre-existing conditions
- Critical illness policies can be expensive
Family Income Benefit
Instead of paying a one off lump sum, family income benefit offers your dependents a regular income from the date of your premature death until the end of the policy term. In the event of a claim, income can be paid monthly, quarterly or annually and under current rules the income is tax free. To ensure that income payments keep pace with inflation, you can usually have them increased as inflation rises. You do also have the option of taking a cash sum instead of the income, giving more options in the event of a claim.
Family income benefit can also include critical illness cover. This is designated to pay the selected income if you are diagnosed with a critical illness within the chosen term.
Benefits of family income benefit
- A cost-effective type of term insurance in relation to the cover required (sum assured)
- Regular payments are treated as capital and are tax-free
- Premiums are low as this is a form of decreasing term insurance
Disadvantages of family income benefit
- Family income benefit has no cash in value at any time
- Medical evidence will be required and possibly a medical examination for those in poor health
Whole of Life Cover
Whole of life cover – As the name suggests, whole of life cover helps you protect your loved ones financially with cover that lasts for the rest of your life. This means the insurance company will have to pay out and so, premiums are therefore higher than those charged on term assurance policies.
The main reasons people still take out whole-life cover is:
- To help cut their family’s tax bill, particularly inheritance tax (IHT). When you die, IHT is charged at 40 per cent on all your assets worth more than £325,000 (in the 2016-17 tax year). This includes the family home, which means that millions now pay this unpopular tax.
- Pay-ins for funeral costs
- Providing an inheritance for your family members
With some plans, you keep paying in until you die, which can be expensive. But with others, payments stop once you reach a set age, even though cover continues until you die.
Benefits of whole of life cover
- Premium payments can be guaranteed which means they will be the same from the time you sign the application until the policy is no longer in force
- If you take out a whole of life policy and write it under trust, your beneficiaries should receive a tax free lump sum, which can be used for any purpose.
Disadvantages of whole of life cover
- If you do not keep up the monthly premiums the policy will not pay out
- Premiums are normally higher than standard term insurance policies
Fortress Financial Services are an appointed representative of Intrinsic Financial Planning Limited and Intrinsic Mortgage Planning Limited, which are authorised and regulated by the Financial Conduct Authority.
The Financial Conduct Authority does not regulate auto enrolment, inheritance tax planning, trusts & wills.