Let’s be honest, contemplating the various ways you could meet your end is a morbid matter.
This probably helps explain why so many of us choose to avoid life insurance altogether – a recent survey by Friends Provident found that 20% of fathers in the UK had absolutely no cover.
Interestingly, the survey found that dads were more likely to spend money on the latest technology than on financial products like life insurance (personally, I can understand how that happens - death and illness cover don’t cross my mind that often. A shiny new gadget, however…)
Unfortunately, simply avoiding something doesn’t make it any less likely to happen. So yes, life insurance is morbid, but it also protects you and your family from financial hardship in the event of death or critical illness.
Consider all the variables
What type of life insurance policy (or policies) you choose will depend on the degree of protection you require.
Also consider whether you want to insure your own life (single life policy), or both yours and your partner’s life (joint life policy). A single life plan pays out on the death of the named ‘life assured’. Some plans also pay out if the life assured develops a terminal illness at least 18 months before the end of the policy.
A joint life plan may pay out when the first of the lives assured dies (joint life-first death) or on the second death. First-death plans are suitable for family cover, second-death plans for providing sums to pay Inheritance Tax bills. Some plans also pay out if one of the lives assured develops a terminal illness 18 months or more before the end of the policy.
The cost of two single life term policies is often only a little greater than one joint life/first death policy and having separate policies does provide more flexibility, especially in the event of separation/divorce.
Level term life insurance
With level term cover the sum assured remains constant throughout the term of the policy. This is the most common type of life insurance.
When you take out a level term assurance policy, you decide how much to insure yourself and/or your partner for and how long you want the cover to last. While there are different types of level term policies, most people find those with guaranteed premiums the most suitable.
The main advantage of guaranteed premiums is that your monthly payments won’t increase during the term of the insurance policy.
Decreasing term insurance
With decreasing cover, the amount which the insurer promises to pay out falls gradually throughout the term of cover.
Such policies are designed specifically for people who take out a loan or mortgage. As the policy holder pays off more of the outstanding capital, so the value of the life insurance needed to cover it falls.
These policies are most commonly joint life-first death plans so that a couple can be sure that, if one of them dies before they have repaid their home loan, the mortgage will still be paid off.
Critical illness cover
For single people with no dependants, critical illness (CI) cover that pays off the mortgage can prove more important than having life cover, as it means you would have a lump sum to play with if you are very unwell.
In the past, some critics have claimed that CI policies often prove difficult to claim. However, this seems to be less of a problem these days - Scottish Widows recently announced that it paid out 86% of CI claims in recent years, while BUPA pays out just over 80%.
It’s worth noting that insurers adopted new rules set by the Association of British Insurers in May 2003, tightening the conditions under which customers could claim on CI policies. Be sure to read the fine print of your policy carefully before signing on the dotted line.
