Understanding Life Insurance

md87

Hi all,

We are looking for life insurance/assurance but are not sure what we need, I would appreciate some advice. I am nearly 30 years old and my wife is a year or so younger. We have 3 children and possibly will be having a 4th. We are in a good position house/mortgage wise - we took a 30 year mortgage when we moved house in 2015, however the reality is that I hope to pay off the mortgage in the next 10 years. Currently we owe just over 100k on our mortgage (have been overpaying by £300-500 per month so definitely looking to pay off much earlier than 30 years).

I don't mind paying a decent amount for life insurance/assurance each month, but I want something "guaranteed" in return. I think we want cover and a lump sum back on death, even if the mortgage is fully paid off by then (i.e. we don't want mortgage only life insurance). When I am doing online quotes it always asks for a term, usually up to 30 years. But my understanding is that if we both lived beyond 30 years we would have paid every month for nothing in return. What should I be looking for, for a guaranteed lump sum back when either one of us was to die.

My in-laws were suggesting an endownment, but that looks like something else all together. I looked at this but it seems to be an investment more than anything else. They got a few decent lump-sums back but I don't think it's what we are after.

Thanks for any advice/comments, much appreciated. :T

tacpot12

Level Term Insurance would pay out a fixed sum if you die before a certain date. You can take out this sort of insurance on joint life basis, so that it covers you and your wife, and can be setup to pay out on either the first person's death, or the second person's death.

So you could take out cover of say £300,000, which would cover the mortgage and leave between £200,000 and £300,000 to the survivor if one of you died. Life insurance can be written in trust which means payouts are not subject to inheritance tax.

An endowment would provide some life cover but also pay out a sum (based on the performance of the life company) at a point in time if neither of you had died. I can see no advantage to endowments. If you want an investment, there are many better investments than investing in a life insurance company), if you want life insurance, buy life insurance.

Weighty1

If you want something which is "guaranteed" to pay out then you want a whole-of-life policy. This simply runs and runs until you die, at which point the plan pays out. The one thing to think about is whether you really need a WOL policy. Once your mortgage is repaid, kids grown up and you are retired do you really NEED life insurance? Also, WOL policies are typically far more expensive than term assurance plans as they guarantee a payout. Would the significantly higher premium still be affordable when you retire and are living off of a pension income? For many people the answer would be no.

Aretnap

The purpose of insurance is to protect you against unexpected, unfortunate events, such as your house burning down, or dying young while your spouse/children still depend on your income. If you don't get a payout from it that's a good thing -it means that your house hasn't burned down, or that you've lived to a ripe old age. Presumably you don't feel the need to find a home insurance policy which is guaranteed to pay out something, whether or not your house burns down, so why should life insurance be any different?

It's true that in the past there were policies sold as life assurance which guaranteed to pay out a lump sum after a certain time; however these were not pure insurance products but hybrid insurance/investment products. They have fallen out of favour in recent years; they are not tax efficient, and their fees were often opaque (and rather high). It is generally considered better to have separate insurance and investment product.

In other words, take out a term life insurance policy for 21 years (or however long you think your family will be dependant on your income). Then pay the money you save by buying a term policy rather than a whole of life one into a stocks and shares ISA (or pension, or other investment product, depending on your tax status and investment goals). If you die within 21 years your family gets a payout from the life insurance. If you live longer than 21 years then you still get a "payout" in the shape of a healthy sum in the ISA - probably more than you would have got had you bought a whole of life policy instead.

dunstonh

I don't mind paying a decent amount for life insurance/assurance each month, but I want something "guaranteed" in return.

Do you pay for car, household, pet, phone insurance?
What do they pay you guaranteed in return?

Endowment policies stopped being retailed in the mainstream after 2004. One of the reasons was because they were less tax efficient than pure life assurance combined with a stocks & Shares ISA.

md87

Thanks all, you helped me to understand.