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Life insurance explained


Life insurance offers financial protection in the event of your early death if you have family dependent on your earnings. It is also important to consider taking out life insurance since the loss of your income, should you die early, can result in problems for your dependants who might need to repay debts or meet tax liabilities.

To help with these costs there are three basic types of life policy, which all provide you with protection by paying a lump sum on death: term insurance, whole life insurance and endowment insurance.

Term insurance is the cheapest form of protection and it can offer high life insurance cover for a low premium. Insurance can usually be arranged to cover just one person, but in some cases cover will also be available for spouses/partners in the same policy. The term (period of cover) might be 10, 15 or 20 years although you can arrange policies to cover you for periods as short as one month.

However, it is important to remember that if you are alive at the end of the term no payment is made and there is no surrender value. In other words, if you stop paying the premiums the cover ceases and there is no refund of premiums paid.

If you decide to buy term insurance, your financial adviser will help you to decide how much cover you need and over how many years you need the cover for. This will depend on how many dependants you have and on how much you think they will need should you die.


There are a range of term options available:

Level term assurance: you pay fixed premiums for a number of years. The policy pays out in full should you die at any point during the agreed term.

Increasing term assurance: the premium you pay increases every year, but you do not need a medical. This option is not usually as popular as level term cover, but many financial advisers believe it should be as people may require additional cover as their income (and standard of living) and inflation increases.

Decreasing term assurance: the payout reduces over the cover period at a flat fixed rate each year.

Renewable term assurance: a short term policy that is cheaper initially. Very often it is used to protect company directors, and can be renewed without further medical evidence.


How much does it cost?


A non-smoking man aged 35 on his next birthday could expect to pay between £7-£12 per month for £100,000 of cover on a 15 years level term policy.


Factors to consider:


Life insurance can be very straightforward and quick to arrange. But life insurance providers will consider individual circumstances that could change the cost of cover considerably. These can include:

· Dangerous hobbies or sports: the price you pay for life insurance will depend on how often and at what level you pursue these activities (especially diving, mountaineering, aviation, parachuting, motorsports)

· Age and weight

· Medical history: premiums will vary (often dramatically) if you have medical problems especially: bowel conditions, cancer, depression/stress/anxiety, diabetes and high blood pressure

· Smoking obviously raises the price of cover

· Sexuality: different life insurance providers also take different approaches when underwriting homosexual men. Your financial adviser will be able to explain more.


Who can sell life insurance?


Anybody can sell life insurance for protection purposes, including financial advisers, insurance brokers, solicitors or accountants. It may also be sold by insurance companies, either face to face, over the telephone or over the internet.  From January 2005, anyone selling life insurance will have to be authorised by the Financial Services Authority or have an arrangement with an authorised firm who will take responsibility for their actions. While buying life insurance direct from an insurance company can often seem to be cheaper, it is usually best to talk to a financial adviser to get the type of cover most suited to your individual needs.


What about tax?


On your death your estate might be liable to pay inheritance tax, which is payable if the value of your estate is over a certain limit. If you own your house your assets could easily exceed the amount above which inheritance tax is due (although any amounts owed, such as a mortgage, are excluded from the calculation). So it is worth asking your financial adviser about putting your policy in trust. This means that the proceeds of your policy will be paid to your dependants in a quick and straightforward manner. Trusts are usually very simple to arrange, and your adviser should be able to sort it out at no extra charge to yourself. Trusts mean that the money is paid directly to your beneficiaries without reference to your will or to the taxman.


Anything else?


Many life insurance policies offer a waiver of premium option. This means that if you cannot follow your normal occupation because of illness or injury, the insurance company will pay your premiums to maintain the benefits under the policy. Ask your financial adviser for more information.


David Sawers, Deputy Editor, Health Insurance and Protection


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