Life Insurance: The Basics

marathonic

Note: I am not an IFA or even a finance expert. The information below is purely based on research when getting my own insurance. Research any information here further before committing yourself to any decisions.

When considering getting Life Insurance, work out what the biggest risks in your life are, i.e. what you fear most from a financial perspective. Prioritise them so that, if you can’t afford to cover them all, you can cover the ones you fear most.

Figure out what coverage you have through your employment – but bear in mind that, should you switch employer, you may have no coverage with the next. If your employment covers some of your needs, you have less coverage to take into account when providing for yourself.

Write the policy in trust so that the people benefiting from the policy don’t have to go through the probate process to receive the payout. This also avoids inheritance tax that may become payable if it weren’t written in trust. Writing in trust is a simple process that usually just involves asking the insurer for the correct form.

Check the Defaqto ratings of the various providers for the product you are looking to purchase here: http://www.defaqto.com/star-ratings/. A higher number of stars usually means better coverage. If you get quotes on a comparison website, you can compare the products from the various companies here as well.

Income Protection: Many would argue that this is superior to Critical Illness policies, and would probably be correct. If you get a critical illness, it’s true that you’ll get a good payout on a Critical Illness policy. However, there is a list of approximately 40 illnesses for the policies and they also define a severity for each of these illnesses. If you get an illness that’s not in the list or get one that’s on the list but not to the required severity, you would not get a payout. When getting Income Protection, ensure it’s got an ‘Own Occupation’ definition - which will payout if you can no longer do your own job as opposed to if you can no longer do ANY job. There is a deferral period for these policies which means that, after you are no longer able to work, you must wait the required number of weeks before payments start. The longer your deferral period, the cheaper the premium – a lot of people have policies with a 26 week deferral period.

Critical Illness: As stated above, you get a payment if you get one of the listed illnesses to the required severity. It can be decreasing term, level term or on a family income benefit (see below). When getting quotes, check out quotes for Life & Critical Illness as well as standalone Critical Illness. The premiums can be virtually identical in which case; you should go for the Life & Critical Illness.

Life Insurance: Pays out on death. They are simple enough policies that have no Defaqto ratings because they’re not needed – if you die, you die. There’s no distinction between different types of deaths.

Decreasing Term: Potential payout decreases through the life of the policy. This is usually best for covering a repayment mortgage which will also decrease throughout the term. They are the cheapest type of policy. Sometimes, if you are young and have a smallish mortgage, you are better going for level term for the simple reason that the insurers have minimum premiums for policies. If a level term policy is available for a very similar premium to decreasing term, you’re better going for the level term policy. On death, this would pay off the mortgage and any remaining balance would go to your loved ones.

Level Term: The level of payout does not reduce over the term of the policy. This can be taken as a standalone policy or alongside a decreasing term policy. It’s a good option for covering interest only loans and/or mortgages. It can also be used, for example, if you want to have insurance to cover a child's college expenses should you pass away or get critically ill.

Family Income: Instead of paying one large lump sum, this pays a smaller, annual amount. If the policy were taken over 20 years with a £10,000 annual benefit, and you were to pass away after two years, this would pay out £10,000 per year for the remaining 18 years. If you passed away after 19 years, it’d only pay £10,000 for one year. As the level of payout reduces over time, they can be cheaper than level term at times, depending on your needs. It's a good option, for example, if you need to cover income for a non-working spouse until they reach retirement age.

Increasing Benefit/Inflation Protected: The benefits will increase with inflation. The premium will also increase with these policies – and usually by a higher amount annually. For policies with terms of longer than 15 years, the premiums can become so out of whack with the benefits that the policies represent very poor value. It’s for this reason that I favour going for a policy that isn’t linked to inflation and selecting a higher level of coverage to begin with. You pay more this way in the early years but save, significantly, in the later years.

Guaranteed/Reviewable Premiums: Always go for guaranteed. With a reviewable premium, the insurer can periodically review and increase premiums – even if your circumstances have not changed. With a guaranteed premium, they cannot increase the premium for the life of the policy.

Waiver of Premium: If you become unable to work for more than 6 months, your premium will be paid for you with this benefit. It costs a little extra and, if you have a standard income protection policy, you shouldn’t need it as you can cover the premiums using the payments from that policy.

Getting Insurance through Banks: They are usually tied to a single insurance company and the premiums can be double the price (and times more) that you could source elsewhere.

Getting Insurance through IFA’s: They will review your overall finances and determine the best products to fulfill your needs. They charge a commission for this service – sometimes through a fee to you and sometimes through a commission from your insurance company. If you are a non-standard case, for example, if you are obese or have a family history of significant medical issues, you are usually better going this route. An IFA can usually find out whether you are likely to be accepted prior to you actually applying. If you are a non-standard case and go the comparison website approach, you may be rejected after picking the wrong company for your case. If this happens, you have to tell all future insurers about your rejection – for the rest of your life.

Getting Insurance Through Online Comparison Sites: This is the cheapest method and is the best if you know exactly what you are after. You will have no comeback if you choose the wrong product for your needs as they work on the basis that you have been given no advice. I got my Life & Critical Illness policy through http://www.moneyworld.com/Life-Insurance/index.htm. With this method being so cheap, you could find yourself getting over-insured but paying less than you would have if you went the bank or IFA route and got the correct amount of insurance.

marathonic

Also, bear in mind that some policies have additional coverage not detailed above. Such coverage can include children's coverage as well as coverage for yourself between the time of application and the time your policy goes into force.

Some will also have flexible options so that, should a life changing event happen, you can increase coverage without further medical questions. Life changing events can include having a baby, upsizing your home, getting married, etc.

If either of these are important to you, make sure to research the policies a little further before committing to a particular company.

ACG

Thats a pretty good post for someone not in the industry. It seems pretty much spot on.

Just a few things to add...
Using a broker, will result in them (if theyre a good one) will keep in contact with you and offer you reviews. The benefit of this is that there are times where we see clients who havnt looked at their cover for 1,5,or even 15 years plus - this means since then you have mvoed house, had children, been divorced etc and are potentially paying for cover you dont need or are under insured.

The other thing as marathonic has mentioned is that some insurers including extra benefits - for instance money towards complimentary therapies (massage for a pulled back, to see a psychiatrist etc), some allow you to speak to trained nurses on the phone, a couple of insurers even allow you to send off your medical records to specialists in other countries to get a second opinion - free of charge.

This is the added value that a broker can add to doing it yourself. Price isnt everything for an extra £1 a month (for example) you could have something with all the added extras... on a personal note, i took my income protection insurance out with the 3rd most expensive at the time - it cost me an extra 77p a month, the extra included i would have paid £10 extra a month for.

(Sorry for banging the broker drum).

But thats a really good post.

marathonic

Replacing Existing Policies: Be very careful here. Read your originally policy documents carefully and compare them to the proposed replacement policy documents.

You are given a cooldown period of 30 days with a new life insurance policy. Take this opportunity to, once again, compare the old policy with the new one. If you change your mind, you should be able to cancel and get a refund of premiums paid.

Do not cancel the old policy until the new one is in place and you've paid your first premium. Otherwise, you may find that the new one isn't accepted or has a large loading applied to the premium.

When comparing the policies, you are looking at the cost as well as the term (longer term covers you when you are older so is more valuable) and extra benefits.

For a standard life insurance policy, the comparison should be relatively straightforward because, as before, if you die, you die - it's there in black and white.

For a critical illness policy, the conditions covered as well as the defined severity of those conditions can be different. A lot of older policies will cover you for less severe cases of each condition. You need to decide whether replacing your old policy makes sense for you after taking this fact into consideration.

In order of most common occurences and, therefore, the ones you should pay most attention to when comparing policies, the main critical illnesses are:

• Cancer,
• Heart attacks,
• Strokes,
• Multiple sclerosis,
• Coronary artery bypass,
• Benign brain tumours

If your old policy has coverage for less severe cases of a lot of the above conditions, you should seriously reconsider switching.

busicat

[FONT=&quot]:beer:Seriously good summary, Marathonic - impressed!

Just one point to watch out for, to be clear about expectations of the own occupation definition under income protection: You've said it pays out if you can't do your own job...which is what most people would expect and is what is stated or implied on many of the places you will have researched.

Currently though, it doesn't mean literally your own job unfortunately. As the Ombudsman's fact sheet puts it "This requirement is not normally job specific. The consumer has to be unable to carry out the general duties of the occupation they were following before their disability."

So in my case, one of the many reasons for trying to turn my claim down was that I'd be able to do part of my role using voice recognition (VR) technology. However for various (good) practical reasons, that was not a solution available with my then employer. So the standard of disability was judged according to a theoretical equivalent role, assuming that other offices in my field do provide VR. (No evidence was given of the truth of that.)

A catch-22 then for anyone with this sort of situation...just supposing there was another job available and in a suitable location, what would be the chances of being successful in being chosen for it whilst signed off sick from current job?!

If the Sergeant Review of Simple Financial Products due out soon was to achieve just one thing, getting this sorted out would get my top vote! Not holding my breath, but do feel strongly enough that I bothered to do an individual response to the review.

Maybe if more people knew and campaigned about this, it would stand a better chance of being sorted. Which would be fab, given this is arguably the most important life product of the lot.[/FONT]

davidrichard899

firstly , thanks for this informative post. It's help a lot for every person who is insured or not. People who are insured they get the the quite knowledge by your information and who are not insured they get the insured in meantime.