Having life insurance is one of the most important things that you can do to protect your family and loved ones from additional stress after you pass away. Losing a partner or parent can be devastating but having the extra burden of financial problems on top of this grief can be unbearable. This is where life cover comes in.

What is life insurance?

Life insurance is a way of making sure there is financial aid for a named beneficiary or beneficiaries after you pass away. There are many varieties of life insurance and within those varieties there are different types of cover. It pays to shop around and discuss your needs with your family and professional insurance brokers.

Life insurance works by guaranteeing a financial return on the sums that you pay (normally monthly) into your policy. Different policies work in different ways and some are index linked and others have a set amount payable each month with a set amount payable on the event of death.

What are the different types of life insurance?

There are two main types of life insurance. One is for a fixed term and the other is for the whole life of the policy holder and is called permanent life insurance or sometimes life assurance. Note the difference between assurance and insurance.

Basically if you took out a life term policy you would state whether you wanted the term to last 10, 15, 20 years or whatever options were available. You would then pay a premium each month until the policy ended. If you died during the length of the policy then your beneficiary would receive the death benefits. Life term policies can be renewed at the end of their terms usually at a higher monthly premium or converted into permanent life policies.

If you took out permanent life insurance cover then you would be covered for your whole life until the event of your death. The difference in the cover these policies provide can be small but may cost the holder substantially different amounts of money. For example a healthy woman in her thirties could take out a life term policy for 15-20 years and pay around £15 a month. However if the same person took out a permanent life policy they may end up paying a much higher premium either monthly or annually and perhaps 10 times the amount of the life term policy. This is because of the different benefits that each type of insurance provides.

Why should you have an insurance policy?

You might already have car insurance and also have cover for your home so it makes sense to cover your family upon your death too. The death benefit paid out can provide your children or partner with a means to cover your health costs, mortgage debts, burial fees and other financial needs. If you are older, single and without dependents you may not feel the need for insurance but for most people with a family life insurance is an essential part of leaving them financially secure once they pass on.

Is it a good investment?

Compared to other forms of investment permanent life insurance is not necessarily seen as a great way to invest cash. However it has other benefits. Once a life insurance policy is taken out for a specific amount you know that your family will receive that amount. For example if you take out a policy for £500,000 then at the end of your life that is what the beneficiary will receive. If you invest money into property and the market tanks then you may leave behind something worth less than you expected. Benefits of taking out a policy are that the amount payable is fixed, the premiums will generally stay the same and inheritance tax can be avoided by using a trust.

How can you avoid paying inheritance tax on your life insurance?

You want to leave your family in a financially favourable position and taking out a life insurance policy is one way you are choosing to do this. However you don’t want the amount paid out to be subject to inheritance tax. Is there a way around this?

Inheritance tax is set at 40% of any amount above the threshold. The inheritance tax threshold is £325,000. So anything above this is subject to 40% tax. To avoid paying this you can set up a trust.

This is where you make an arrangement that the cash lump sum that will be payable on your death is left to your chosen beneficiary. Then the policy will be looked after by trustees that you choose yourself. By giving up ownership of the policy it no longer comes under your estate. Setting up a trust requires you to seek legal advice and only a specialist should be consulted. Some of the benefits include a quicker release of the funds upon your death but there are disadvantages too and one of them is that by passing on your insurance payout to your spouse you will then increase his or her estate and when they die the sum could be liable for inheritance tax.

Are there any disadvantages to life insurance policies?

While there are undoubtedly many good reasons for taking out life insurance cover to protect your family they aren’t suitable for everyone. If you have left it late in life to consider life insurance then your premiums are likely to be very high. For single people with no dependents they may be unnecessary. They may not be the most financially effective way to leave money behind for your family.

Individual needs will affect how useful life insurance is for you or anyone else considering a policy and taking independent advice is particularly important before taking out life cover. There are many policies and not all are suitable for everyone. Finding the right type along with the right coverage amount is essential. For someone looking for DiscountLifeCover they could look on the internet for there are hundreds of policies and research is invaluable. Some types will provide a steady monthly income for your family upon your death and others will merely cover the costs of your funeral arrangements.

By Sumeet Manhas

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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