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Life Insurance guide

A definitive guide, including the need for life insurance, different types of cover and much more

The essence of Life insurance is that it provides money for your family if you pass away. The life insurance payout money can then either pay off a mortgage on a property, or clear debts and give a regular income.

The main reason behind taking out life insurance is to pay off previous debts which could be make your life difficult if you lose a partner and if the need is there, support your dependants by providing similar or all of your previous income. In this way, Life Insurance is very similar to car insurance or house insurance, as you can pay anually or monthly to a chosen company. In the event of a claim an insurance company will then payout an agreed amount - a 'sum assured' - if you pass away during the life of the insurance policy.

Who really needs to buy life insurance?

Many mortgage lenders e.g. Halifax encourage all their borrowers to apply for life insurance cover, but it's only really necessary if you provide for a partner/wife/husband and/or children. If you're single and free, who stands to lose out if you don't have life insurance? The worst scenario is the mortgage lender, who will sell off your house to clear your home loan.

It really is a good idea to have some funds put away to pay off existing debts and leave your wife and children provided for, over a quarter of UK homeowners don't have life insurance cover to pay off a mortgage, let alone pay off existing debts or provide an income.

TIP: Don't over- life insure, aim to leave your family provided for, but don't leave then with money for millionaire lifestyle otherwise this will reflect in you life insurance premiums.

Large life insurance payouts mean large insurance premiums!

Make sure you cover your partner equally with life insurance, especially if you have children, this leaves your partner with an income and the time to look after children.

Where can you buy life insurance?

Always take a good look around, take time to look at around five or six life insurance policies more if you can, this gives you a wider picture of life insurance premiums and the difference in cover types and costs. Typically If you choose to get a life insurance policy from your mortgage lender, however there is no harm in trying, always take note that a £10 saving a month saves you £3,000 over a 25 yr life insurance policy.

Life insurance cover and how much ?

Having a partner or children, means you should save enough to pay off any mortgage and anything else such as debts. Also it is an idea to get your life insurance to cover part of your income. Realistically it is ideal to cover ten times your income, this allows your dependants a decent standard of living.

The best way to determine how much to pay on life insurance premiums, is pay as much as you can afford if you can afford £20 pcm this will cover a 35-year-old non-smoker male a minimum of £250,000 life insurance cover twenty years..

One recent report estimated the cover we take out and and the cover we should take out have a discrepancy of around £2,000,000,000,000.

For how long should you be covered?

Ideally life insurance should cover you until retirement age, sixty or sixty-five. However, young children should be covered with your policy till they are financially independent.

Life insurance, Tax and avoiding IHT

All life insurance payouts are tax free, however it could be taken in to account as part of your estate, therefore liable to Inheritance Tax (IHT), currently 40% of a payment

However you can avoid IHT by placing your life insurance in a 'trust', enabling any life insurance payout to be available to your dependants directly, avoiding Tax and any Will, therefore speeding up the process of payout. Many trusts allow control of what happens to life insurance payouts after death, these can't be used for a life insurance policy that is assigned to a mortgage lender.

Life insurance premiums

Premiums for life insurance are decided on the strength of a few factors including the sum assured, policy length ('term'), any individual lifestyle factors e.g. occupation, age, health, gender and the ultimate if your a smoker, if you don't smoke or giveup you could save a fortune on life insurance.

Like any cover life insurance is a gamble, much like car insurance however life insurance is not a legal requirement, it purely provides peace of mind if the unthinkable does happen. It provides for your family when you are gone, ensuring they are covered. Life insurance premiums vary however, they do reflect a 'what if' scenario meaning premiums are usually quite high, in which case this ensures a healthy payout. If you outlive policy, you receive nothing, but be thankful you are alive.

Insurance price hike

Since all major companies and lenders have jumped on the life insurance bandwagon, the overall cost of a policy has dropped, meaning that policies taken out in the latter years could be grossly overpriced in relation to todays. Cover bought in the past may now be overpriced, it is worth checking our life insurance brokers, as they may be able to save you a substantial sum on what you are currently paying.

A greta way to save money on your policy is to opt for 'his' and 'hers' life insurance policies, as oppose to 'joint life, first death policy cover. This type of policy pays out once and ceases after the unthinkable, this leaves the other partner uninsured.

Having two individual life insurance policies eliminates this problem. Individual policies also benefit you in inheritance tax, and if you divorce.

TIP: Usually a broker or insurer will set up a trust for free.

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