How To Choose The Right Life Insurance Policy

Life insurance – what is it & how does it work?
Life insurance is the simplest, most popular and cost effective way to financially protect any dependants in the event of your death. While it won’t help those left behind to get over their loss, the benefit of a lump sum, in most cases tax-free, will guarantee your family aren’t deprived of funds during an already stressful time.

With the cost of life insurance at an all time low, now is the perfect time to arrange cover. For those in good health, a policy that was taken out six years ago can be replaced today for significantly less, despite the fact that being older, one is in theory at greater risk. The industry over-reaction to the threat of AIDS initially caused premiums to rocket skywards, but when the expected epidemic failed to materialise, costs fell rapidly from the mid 1990s onwards.

Life insurance premiums vary from person to person, with factors such as age, gender, current and previous health, lifestyle, term required, occupation and smoker status all having an influence. Risk is assessed with the use of what’s known in the industry as ‘mortality tables’ to determine the premium for a particular individual, to which a ‘loading’ may be added which takes further account of other factors relating to medical history and lifestyle.

Whole of life versus term life insurance

Life insurance can be split into two main types, known as ‘whole of life insurance’ and ‘term life insurance’. In essence, as the name suggests, whole of life insurance provides cover for the lifetime of the policyholder, whereas term life insurance provides cover for the duration of an agreed period in time. For all policies it’s crucial to ensure that premium payments are kept up to date to keep cover in place.

Whole of life insurance

Whole of life insurance tends to be the more expensive option, though often has the advantage of being more flexible. It can fulfil many purposes including personal protection, family protection and inheritance tax planning, and can be combined with a term life insurance policy to cover specific debts as required.

Typically, policyholders’ contributions are invested and life insurance benefits are ‘purchased’ using the investment fund. The fund’s performance, along with other factors, has a significant effect on the level of future benefits. As the policyholder’s age increases the cost of the insurance increases, thus reducing the sum in the investment pot. The investment element varies from insurer to insurer; some are more generous payers than others, making the expert advice of an insurance broker or independent financial adviser invaluable in choosing such a policy. Some plans require contribution until the policyholder’s death, some for a set period of time, and some up until a certain age is reached, with additional options available to cover specific illnesses or disability. The common factor throughout is that cover is maintained for the life of the policyholder, making whole of life insurance a very popular way to leave dependants a nest egg.

One great benefit of whole of life insurance is that the guarantee of a payout on the policyholder’s death, at whatever point in time that may be, removes much of the guesswork involved in other types of life insurance. As long as premiums are maintained, cover is assured. Although the more expensive option, it’s important to note that premiums are lower than those one would pay in later life by repeatedly renewing term life policies.

Term life insurance

A simpler option, term life insurance offers basic cover for a set number of years, usually at low cost. A term life insurance policy requires a regular premium payment and pays out a lump sum on the policyholder’s death providing this occurs within the term of the policy. Death outside of the term to which the policy applies won’t result in a payout, meaning the loss of any investment made, making it particularly important to be sure that cover is adequate and the term is appropriate.

Some policies can be extended to provide critical illness cover; full disclosure of all medical conditions, existing and historic, is vital when arranging this to avoid a denial of payment just when it’s needed most. It’s also imperative to be certain exactly which conditions the policy covers, as insurance companies are notoriously specific as to the illnesses they’ll pay out for!

Term life insurance cover can be further categorised into these types:

Flat-rate (or level) cover – offers a set amount of cover for the policy term, fixed from the outset.

Decreasing (or mortgage protection insurance) cover – cover decreases over the term of the policy, often inline with a diminishing mortgage debt.

Family income benefit – pays out a regular income rather than a lump sum during the policy term.

Increasing term assurance – premiums and benefits increase each year, usually in line with inflation, allowing the protection of a lifestyle.

Convertible term assurance – gives the option to convert to a whole of life policy without giving new information about your health.

How much cover do I need?

It’s important to correctly identify your dependants’ financial needs to establish just how much life insurance cover to arrange. A general rule is to choose a policy providing at least ten times your salary, but more may be appropriate, with the amount varying depending on how you intend it to be used. Basically you decide how much you want your dependants to receive in the event of your death, and your premiums will be determined accordingly.

Don’t overlook factors like:

  • Mortgage repayments
  • Replacing the primary earner’s salary
  • Replacing childcare
  • Education expenses
  • Outstanding debts
  • Support for a business partner
  • What do I need to look out for?

    Before signing anything, look carefully at the terms and conditions of your proposed life insurance policy giving particular attention to any regulations pertaining to payouts. Some policies may not, for example, pay out if death is caused by participation in certain dangerous sports or activities.

    In the case of index-linked policies which allow for economic change, it’s important to establish whether the policy is linked automatically or whether there’s the need to opt-in to linkage each year; failure to do so could result in being locked out of future linking.

    Though life insurance payouts are usually tax-free, there are circumstances where taxes will apply. A life insurance policy can be placed ‘in trust’ to protect revenue and provide payment more quickly, though this is a complex issue which needs professional advice for clarity before proceeding.

    A joint-life policy is a popular and often less expensive option for couples which covers the two of them simultaneously, with options for payout on a first-death or last-survivor basis.

    How much will it cost?

    The cost of each different policy offered by a life insurance company varies widely, and depends on a number of factors: the type of policy, the length of the policy term, the size of the death benefit, the flexibility of the policy, number of people covered by the policy and so on.

    The only certainty is that the longer you delay getting life insurance, the more expensive the premiums will be!

    How to Save Up to 50% Buying Income Protection Insurance

    Simply put, income protection insurance, (otherwise known as disability insurance or sickness and accident insurance) provides an income in the event that you are disabled through sickness or injury.

    Hopefully you will never have to claim on an income insurance policy but, in the event that you do, I’m sure that you would like to know that it will pay you as much as possible for as long as you need it.

    Unfortunately, like most things in this world, getting the best will usually cost the most money.

    So, in order to contain costs, a lot of people make sacrifices when buying income insurance by settling either for a limited benefit payment period (the maximum amount of time that your insurance company is obliged to pay you in the event of a claim) and/or for a lower monthly benefit (the amount that you get paid whilst on claim) than is needed.

    Both of these money-saving strategies are seriously flawed however because the biggest cost to you could be the financial loss that you would incur should your disability be long term.

    You could probably get by for a few months on a reduced income benefit and, let’s face it, the likelihood of something taking you out of the workforce long term is pretty remote, right?

    Well yes, the odds of you suffering a serious long term disability may be low… but the consequences of having inadequate long-term income protection could be devastating – and that’s why we buy insurance… to deal with things we can’t afford, not the things we can!

    So consider this. Having no (or limited) income for a few months might cause you to be late in paying some of your bills, your mortgage and loan payments might fall behind and your credit card limits may become exhausted… but you will probably still survive financially.

    You may have some benefits available through your employer and you may be eligible for some form of social security assistance. You may need to dip into your savings or to sacrifice short term plans such as a holiday or a new car, but none of that will be your financial ruin.

    On the other hand, having to rely on friends, family, social security or other hand-outs should you develop a long-term degenerative condition is not a future that anyone aspires to.

    So wouldn’t it make sense then, rather than sacrificing your long term security, to consider an income insurance policy with a longer waiting period?

    Often referred to as a “policy excess” or “deferment period” your waiting period is the amount of time after you have become sick or hurt that you become eligible for benefit payments under your policy.

    In some circumstances, extending your waiting period from 14 days out to 30 days can mean a saving of up to 50% on your monthly premium.

    It’s also possible to buy policies with waiting periods of 6 month – or as long as a year, even two, although the savings in these cases are not usually as big proportionately as the 3 month waiting period option.

    Now I know what you’re thinking… a broken arm or leg won’t last 3 months – and a minor injury is a considerably more likely occurrence than a long-term disability, particularly if you are young. But there are policies on the market that include what are known as ‘defined benefits’ that provide you with a guaranteed minimum payment for specified conditions (like broken arms or legs) and are not necessarily impacted by the waiting period.

    As an aside, insurers that offer these defined benefits can do so because they are not particularly expensive claims to administer. After all, a broken leg is a broken leg. Hardly a need for second opinions, specialist visits or conjecture as to whether or not you are disabled. In fact a doctor’s certificate and an x-ray are pretty much conclusive and, because the benefit is usually defined in terms of the number of weeks’ payment you are to receive, then it’s pretty much a case of open and shut from a claim perspective. Pay the money and close the file.

    A word of caution however. Before jumping into a policy with a longer waiting period, you should find out exactly how the policy deals with recurrent disabilities. You don’t want to have to wait 3 months twice! Most policies will waive the excess for a recurrence of the same thing but they may put a time frame on how long after the initial episode you can claim on a recurrent disability.

    In closing, decisions relating to income protection insurance should never be taken lightly. Once we have become mature adults and start to grow older our health deteriorates, that’s just a fact of life. So, if you are thinking about reviewing your existing income protection insurance or buying a policy for the first time, do it today if you can because you might not qualify for a new policy tomorrow.

    And if you are not thinking about these things then you should be!

    Oh, and always seek the advice of an insurance agent or broker with a specialty in this field.

    Insurance Salesperson Or Benefits Counselor?

    Are you in the insurance industry? Do you help handle the finances and/or human resources in the company you work in? Do you work with other people in the insurance industry? Let me address each set of people and give everyone some free advice…

    To the Insurance Industry professional…

    How do your clients view you? Are you just a person there to sell them something or are you a trusted advisor who guides individuals based on their separate and personal needs? If your clients hesitate to

    talk to you about their real needs, then you may be in the wrong camp. If you are truly the licensed professional that your certificate says you are, you need to take time to get the whole picture of each person you comes in contact with you before you start to suggest options that can fill those important gaps in their insurance portfolios. To get the whole picture of someone and their needs takes a little more time, but it sure does help you sleep better at night knowing that you did what you could to help them fill needs in their own individual lives and not just assume (because you had a great new product to offer) that they needed what you had to sell.

    Human Resources/Company Owner…

    Who are your vendors for insurance in your company? Better yet, who are your representatives for those vendors? Are they selling your people or providing them what they need? Are they there when you need them for something that does not involve selling something? If your vendors for something as personal as insurance decisions for your individual employees are not attuned to taking the time it takes to talk with your people and see where their needs are, you are doing your company and your people a great disservice. Watch out for vendors who change up representatives every few months. That is a sign of either a harsh work environment (high turnover) or company instability. Do your homework to keep you, your company, and your employees safe from the insurance vultures that are out there.

    Insurance Colleagues…

    In most people’s eyes, insurance is insurance. If you have partnered with someone to help you with your clients, be sure they have your level of expectations when it comes to integrity and professionalism. If you are not careful whom you pick to partner with, you could find yourself replaced in a company or worse…given a bad reputation because of something “that person you brought in” did.

    If you land in any of these categories and would like to be sure you work with a professional person and organization, contact me and I am sure I can help.