What other types of life insurance are there? There is a whole range of insurance policies to provide for your family should the worse happen. While a lump sum for your family after your death may be a comfort, some people prefer to take out a policy that will give them a regular income instead to make up for the loss of their earnings. This is called family income benefit. It takes away the worry of having to invest a lump sum to make sure the household bills can be paid. Like term insurance, this type of policy has a preset end date. The drawback with family income benefit is that the income stops when the end of the term is reached. Say you die two months before your policy is due to expire, then your family will only receive payments for those two months. You can still buy term insurance as well to cover large debts, such as the mortgage, if necessary. For those concerned that life cover could end too soon, there is a whole of life policy. As its name implies, cover will continue until you die as long as you keep paying the premiums as there is no preset end date. This type of insurance is more complicated and more expensive than straightforward term insurance. The cost of a whole of life policy is based on your age, health and occupation. Part of the premiums can go towards an investment fund as well as buying life cover so the amount your family will receive depends on the performance of the underlying investment. There are three main types: guaranteed, balanced and maximum cover. With a guaranteed policy the premiums are fixed for life and do not rely on the investment performance of a fund run by the life company but it is the most expensive option as it will inevitably pay out at some point in the future. The other two both have an investment element. Maximum cover is the cheapest option at the start as the early premiums go towards life insurance with only a small amount being invested. But as you get older, the policy is reviewed – usually after ten years and then on each sixth anniversary – and is likely to become more expensive each time. With balanced cover, a large chunk of your premiums are invested. The aim is that the fund should increase in value enough to cover the pay out as you age and become more likely to claim. But it depends how well the fund is managed as it is also subject to regular reviews. If it fails to meet expectations, you will be asked to increase your premiums or accept a lower payout. This type of policy is more expensive than maximum cover from the start. Whole of life policies are often the subject of complaints handled by the Financial Ombudsman Service (FOS), which says they give rise to some of the most complaints. This is usually because policyholders didn’t realise the premiums could rise to such high levels because the investment return has not been good enough or because the policy wasn’t suitable for them. Price hikes can come at a time when people can least afford it, for instance once they’ve retired. If you weren’t told premiums could rise over time, you have a legitimate complaint for mis-selling. You can cash them in, but you may not get back as much as you’ve paid in. It is best to take advice from a specialist before buying a whole of life policy. Moneysupermarket has qualified advisers who can take you through your options and discuss your needs. Some term insurance policies can be converted to whole of life policies, known as convertible term insurance. Although you won’t be asked to go through a health screening when it is converted, premiums are likely to increase. This type of policy is more expensive than standard term insurance. Over 50s insurance. These are often advertised on daytime television and are popular among older people as there’s no need for health screening before taking them out. As there is no risk assessment, almost anyone is accepted, and it appeals to those who would struggle to buy other types of life cover because they are elderly or in ill health. It is a similar policy to whole of life insurance as it pays out whenever you die rather than having a definite end date. You can usually start the cover up to the age of 75 or even 85 from some insurers. They are attractive to older people because the premiums are usually fairly low – sometimes as little as £5 to £15 a month – but so is the sum insured. They are often used to pay for your funeral. The risk is that you will pay more in premiums than the final lump sum your family will receive if you live for many years after taking it out. Terms and conditions can be strict and you may end up paying premiums for the rest of your life. Some insurers no longer expect you to pay premiums once you reach a certain age, say 90 or 95, but if you stop paying the premiums before this cut-off date you won’t receive anything. If you die within a year or two of taking out this policy, there will be no payout, though some insurers will repay the premiums during this time. Do check the policy details carefully. Always put your life insurance policy in a trust It is simple case to ask your life insurer to write your policy in a trust when you take it out. The insurer will handle all the paperwork for you. The reason for this is that the money intended for your beneficiaries will not be added to your estate if it’s in a trust so the payout won’t be liable for inheritance tax (IHT) if your assets are over the IHT threshold. The IHT threshold is currently £325,000 for a single person or £650,000 for married couples and registered civil partners in the tax year 2012 – 2013. You’ll have to pay 40% tax on amounts in your estate worth more than this, including the value of your home unless everything is going to your partner. But by putting your life insurance in trust, it avoids being added to the value of your estate for IHT purposes and your family will receive the money quicker as it doesn’t have to go through probate, the legal process by which your estate is valued and distributed according to your will.
Posted on: Fri, 14 Mar 2014 08:24:55 +0000
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