The Ultimate Life Insurance Guide
As COVID-19 cases reach an all-time high in the UK, the risk of death is a premise that looms over a large percentage of the public. With the UK reporting the highest death toll in Europe, there is no better time than now to begin contemplating the idea of acquiring life insurance. You’ve come to the right place with our life insurance guide.
While it may seem easy to just type “Good Life Insurance” on Google, it is important to know how life insurance works and what features of a policy best suit your needs. To help you gain a better understanding of these key attributes, we at ShieldWise have composed an easy-to-read life insurance guide. Hopefully, this life insurance guide can clear any confusion and assist you in making the right decision.
In This Article:
What is life insurance?
Occasionally referred to as life cover, life insurance is a policy set in place to provide your loved ones with financial support in the event of your death.
Life insurance guide: How does life insurance work?
When investing in a life insurance policy, you are required to pay an agreed premium rate that guarantees coverage. The size of this premium rate is dependent on a variety of factors, including, age, gender, policy type, and medical history (More on this further into this life insurance guide). In the event of your death, designated beneficiaries will receive financial support from the insurance company. This financial support can come in the form of a lump sum or monthly pay out depending on the agreed payment structure offered by the insurance policy.
What types of life insurance policies are there?
As previously mentioned, when it comes to life insurance there are different options to choose from that come with different premium prices and benefits. Some of the types of life insurance you can find in the UK are:
Term Life Insurance
Available at most insurance companies, term life insurance makes use of a term structure that provides policyholders coverage for a fixed period. During the application process, clients are given a maximum term of coverage they can apply for based on their financial capabilities and the insurance providers policy maximum. With this term structure, beneficiaries only receive a pay out if the policyholder dies within the agreed coverage period.
Additionally, depending on a customer’s desired pay out type, the structure of a term life policy can be divided into two types:
- Level Term Life Insurance
- Level term life insurance is the simplest of the two and offers a fixed pay out amount for a fixed policy term. This means regardless of when a claim is made, if the policyholder dies within the policy term, designated beneficiaries will receive the agreed amount.
- Decreasing Term Life Insurance
- Decreasing term life insurance is the more complex structure of the two and offers a cheaper premium in exchange for cover that decreases over time. This type of life insurance is normally geared towards clients who would opt to use their pay-out to cover debts like mortgages. However, it does bare mentioning that normally customers who opt for this insurance policy are required to pay the agreed premium throughout the entirety of the term, despite decreasing coverage.
Whole of Life Insurance
Whole of Life Insurance can be defined as a life insurance policy that ensures, regardless of when a policyholder dies, their designated beneficiaries will receive a lump sum payout from the insurance company. This approach to life insurance contrasts the structure of term life insurance and is often the type of policy assume life insurance is. With whole of life insurance, clients are required to pay a monthly premium until the day of their death to guarantee that a fixed lump sum is paid out.
While on the surface this may seem simple, what makes whole of life insurance stand out is not its lack of a term structure, but rather how customer premiums are used by the insurer. Similar to an investment scheme, whole of life insurance policies invest premiums into a fund that is spread across stocks and bonds. These investment funds serve as the source for pay-outs if a claim is made. Claims made for whole of life insurance policies pay outs are not affected by inheritance tax. Though this may offer an increased payout value, it does bare mentioning that you are at risk of paying an increased premium rate if the investment fund does not perform well.
Critical Illness Life Cover
Critical illness life cover is an insurance policy that users can add to their existing life insurance policy. As the name implies, this policy provides cover to customers in the event of a serious illness contraction or a severe medical condition diagnosis. Depending on the insurance provider, this policy can cover several conditions, including, cancer, cardiac arrest, HIV infection, Parkinson’s disease, and body paralysis.
This cover policy is designed to provide financial support to a policyholder and their family while they focus on medical issues. This financial support comes in the form of a small lump sum payment that can be used to cover cost of treatment or pay for bills. In the event of the policyholder’s death, beneficiaries will also receive the agreed lump sum payout if the terms of their insurance policy are met.
Over 50’s Life Insurance
As the name suggests, over 50’s life insurance is an insurance policy aimed at clients 50 and over. Geared towards an older demographic, this insurance policy requires no medical information and offers a relatively cheap premium rate depending on the insurance provider. Policyholders of this insurance type are required to pay a fixed premium rate till a certain age agreed upon by the insurance provider to receive full coverage till death.
Due to the potential risk of death associated with older clients, most insurance companies have a qualifying period that can range from a year to two years depending on certain elements. After the completion of this period, policy applicants are granted full coverage until they are unable to meet their payments. This policy is suitable for individuals who want to start planning for their death and leave some form of support after their passing.
Joint Life Insurance
Joint Life Insurance is a policy type geared towards two policyholders instead of one. Typically used by couples, this insurance policy is often cheaper than normal life insurance since the premium rate is split between two people. The level of cover provided by this policy is dependent on certain factors, including, the salary of both applicants, monthly spending figures, and financial responsibilities. In the event of a death, the surviving partner will receive a lump sum pay out. However, it does bare mentioning that once a partner of a joint life policy dies, the corresponding partner only receives one pay out and loses their coverage.
Family Life Insurance
As the name implies, a family life insurance policy provides cover for the registered parents and children of a family. If a family member dies, this policy ensures that the surviving parent will receive a lump sum pay out to cover any debts or day-to-day expenses. Similar to a joint life policy, the premium rate policyholders must be pay is influenced by the number of people covered. However, this premium rate decreases once a child reaches a certain age and is no longer applicable to receive coverage from the policy.
While this policy may seem good, it does bare mentioning that once a claim is made after the death of a family member, the remaining family lose the insurance policy and must apply for a new one.
Income Protection Insurance
As the name implies, income protection insurance is a long-term policy that provides financial support to the policyholder if they are unable to work because of an illness or injury. Available at selected insurance providers, this policy ensures that the policy holder continues to receive their normal income until they are fit to return to work. Unlike a critical illness policy, the pay out made from an income protection policy is set in monthly instalments relative to the client’s income rather than a fixed lump sum.
However, most income protection policies have a mandatory waiting period that must be established before the payments begin. To incentive choosing a longer waiting period, most insurance companies offer a lower monthly premium the longer a policyholder waits.
Business Protection Insurance
Business protection insurance is a policy in this life insurance guide designed to financially support a company when its owner or key figures are affected by a serious illness or death. The loss of a key figure in a business can often have a negative impact on a company’s performance and operations. To deal with this issue, a business protection policy ensures that a business can survive during this challenging period when one of its key figures is no longer able to contribute.
Due to the complexity associated with specific business models, most business protection policies offer a variety of services that meet the demands of a client. These services can include:
- A relevant life cover plan designed to provide an individual death-in-service benefit to a business’s employees.
- Business loan protection that offers financial support when paying outstanding overdrafts left behind by the death of a guarantor.
- A guarantee to provide support in buying out the shares of the deceased key figure so that the business remains in control of the intended board or owners.
With the current pandemic, this is an ideal policy plan for companies and family business owners who cannot afford to lose any key figures during an already rough period.
An endowment policy is an investment product that some life insurance companies offer to customers. Similar to a whole of life insurance plan, this policy uses a client’s monthly premium to invest in shares, property, and fixed-interest ventures. The performance of these investments determines the size and value of the lump sum payout a policyholder is entitled to. However, most endowment policies guarantee a minimum pay out if a client is consistent with their payments and meet the agreed conditions of the policy.
Unlike a whole of life plan, this insurance policy is based on a term structure that will only payout if the policyholder dies in the agreed term of coverage. Given the growth potential of this policy, endowment policies are suitable for individuals who are willing to take a risk in exchange for a potentially higher pay out size.
What factors affect your life insurance quote?
As you can see from this life insurance guide, life insurance can be a great way to provide your family with financial support when you are gone, its relation to your health means there are multiple factors that can affect your life insurance policy. Often, an applicant’s health habits can be the key decider on the amount of premium a customer must pay, and the lump sum pay out they are entitled to receive.
To help you understand what aspects of your life might be affecting your quote, the following section of this life insurance guide will outline some of the key factors insurers consider when pricing their policies.
After reading the section about over 50’s life insurance, this should come as no shock to you that age is one of the biggest factors to influence premium quotes. With mortality rates more prominent in older demographics, insurance companies are normally more inclined to offer cheaper premiums to younger applicants. However, most providers have an age threshold that is heavily influenced by an applicant’s ability to work and pay for premiums. This means applicants too young to earn substantial money and applicants too old to continue earning money can often find a cheaper quote at the risk of a lower lump payout.
Contrary to the notion that we live in an equal world, it may come as a shock to some readers that your gender can also influence insurance quotes. This is not the result of some stance of inequality taken by insurance companies, but rather an outcome of the statistical model’s insurance providers uses to estimate how long an applicant is likely to live. Sorry to break it to all my male readers, but on average women are expected to live up to six years longer than men. For this reason, women typically have cheaper life insurance quotes when compared to the opposite gender. Chin up lads, its only slightly cheaper.
I’m sure you’ve heard the phrase ‘Smoking kills’, well when it comes to life insurance providers this couldn’t be further from the truth. With smoking being linked to several severe medical illnesses such as cancer, most insurance companies are quick to increase the price they quote applicants that have a history of smoking. In some cases, applicants are likely to be quoted up to double the price of a non-smoker looking for the same cover. If you want a cheaper quote its best if you cut your smoking habits while you still have the chance.
For some life insurance policies in this life insurance guide, applicants are required to take a medical test that assesses their blood pressure, heart rate, cholesterol levels and Body Mass Index (BMI). If an applicant is deemed to be unhealthy for their age, they are likely to see an increase to their premium quote or a denial of cover. If you think you are unhealthy and want to get a life insurance policy, we recommend trying to improve aspects of your lifestyle or apply for an Over 50’s life insurance policy that doesn’t request any medical information.
Partying can be fun, but it’s not much fun on your pocketbook or your insurance quotes. Depending on the risk associated with certain lifestyle habits, most insurance companies are likely to change the quote they offer. High-risk activities like free form rock climbing and excessive partying can result in higher insurance premium quotes. In some cases, insurance companies are likely to increase an individual’s premium quote based on their job role and the level of risk it can pose to their lives. That means professions like mining and fishing can leave you with a higher quote than you would have wanted.
Family Medical History
Sometimes your genes alone can be your downfall to getting cheap life insurance quotes as we’ll show you in this life insurance guide. Though this may not be your fault, a family history of serious medical conditions could leave you paying a higher quote than you would have liked. Due to the high risk of you contracting the same medical condition as your family members, insurance companies often increase a client’s premium based on the severity of the hereditary medical condition.
What payout options are there?
Depending on the insurance provider and policy, applicants of a life insurance policy have the option to choose how they want their death benefit to be paid out after they pass. These payout options include:
The most common payout type offered for policies detailed in this life insurance guide, a lump-sum payment can be considered the default payout type. This payout option is ideal for individuals that want to leave a large sum of money to their beneficiaries when they die.
While this may seem like the ideal choice, if the lump sum payment is over £325,000, the payout could be liable to an inheritance tax deduction of 40%. This tax deduction is taken from the value above and beyond the £325,000 boundary. For example, if your payout is worth £600,000, your beneficiaries would face deduction on the £275,000 not covered by the nil-rate band. Since 40% of that is £110,000, that is what your beneficiaries would owe in inheritance tax.
However, if a lump payout is being made to the policyholder’s spouse or civil partner, they do not have to pay any inheritance tax.
In certain policies, it is possible to receive an instalment option that spreads a policyholders payout across multiple regular instalments. This payment method is ideal for policyholder’s who would rather use their payout to help cover the loss of an income stream and monthly bills. While this is not susceptible to inheritance tax, depending on the policy, this pay out structure can be subject to high taxation.
If the payout is an annuity that derives value from proceeds and accumulated interest, this interest income is taxable. Depending on how high this interest income may be, clients may experience heavier taxation accumulated over the years than if they were to request a lump sum.
How do you find the right life insurance policy?
When it comes to this life insurance guide, going to a well-known provider and choosing any random life insurance plan they recommend could be the worst decision you make. Taking premium rates into consideration, life insurance can be an expensive venture if you choose a policy that provides coverage unapplicable to your needs.
Given this potential outcome, it is important to tailor your life insurance policy around elements of your life you deem important. For example, if your children are the most important aspect of your life, it may be more beneficial to look at a whole of life policy instead of a level term policy to avoid inheritance tax.
Understanding what you want from your insurance policy in this life insurance guide can help to reduce premium costs and improve the support you leave behind after you pass away.
How can I find a provider that meets my needs?
Once you have determined what you want from your life insurance policy, as shown in this life insurance guide you can begin searching for an insurance provider that meets your demands. With a variety of life insurance companies offering similar plans at different prices, it is often ideal to compare quotes to see which plan is both affordable and beneficial.
While this may seem tedious, there are multiple cases in which individuals have realised late into their policy that they have made the wrong decision and want to switch to a cheaper insurance company. This decision is often met with surrender fees that at times can be quite high, to avoid this, we recommend comparing plans, so you get the best deal from the start. That’s why we created this life insurance guide.
If you are unsure about what comparison website to use, we at the ShieldWise life insurance guide are here to help. Built on an ethos to help our customers find the right insurance provider, we offer a comparison service that instantly locates affordable insurance plans that meet your demands in addition to this life insurance guide. With ShieldWise, you can save your time, money and most importantly your sanity.