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By Richard Evans Life insurance is probably one of the simpler financial products - you pay some money in, and if you die the policy pays out - so the temptation is to glance at a best-buy table Life cover that lasts for a set period (such as the life of a mortgage) is call "term" insurance; if you survive the term you get nothing back, as there is no investment element. You can choose from level term insurance, where the payout is fixed at the outset and doesn't vary throughout the term; increasing term cover, where the payout and the premium rise with inflation; and decreasing term insurance (used to protect a repayment mortgage and normally about a third cheaper than level term cover), where the payout falls in line with the amount outstanding on your homeloan. Find an IFA that that specialises in insurance "Term insurance has never been cheaper because life expectancy has never been higher," says Kevin Carr, the head of protection strategy at Lifesearch, an independent financial adviser that specialises in insurance. "And once you have started the policy, the premiums won't go up and the cover won't be withdrawn, no matter what happens to your health or your lifestyle. Even if you start smoking, are diagnosed with a serious disease or take up parachuting when the policy is in force, you don't have to tell the insurer and your cover is unaffected." But the other side of this coin, says Mr Carr, is that you have to be totally honest about all your circumstances when you apply for life insurance. "Insurers ask detailed questions about your health, job, activities and family history," he says. "What was considered a totally healthy applicant five years ago may not be now - for example, the insurance companies pay far more attention to conditions such as stress, obesity and back complaints than they used to. Medical problems can cause anything from a 50 per cent increase in premiums to a 10-fold rise, while smokers pay roughly double; older people also pay more. "But don't be tempted to omit anything from your application form. If you die and the insurer discovers that you did not declare something that you knew about when you applied, it may decline to pay out and your family will be left with nothing. If in doubt, put it on the form. If you are honest your claim will be paid." Get a life insurance quote If you think any of your circumstances are likely to result in a higher premium, Mr Carr has some unexpected advice. "Don't just try the cheapest companies. They may offer the best premiums for those in perfect health but often impose bigger increases when the applicant has a medical condition. Instead, try some of the providers further down the best-buy tables - they may be cheaper for the cover you need." Alternatively, you could talk to a financial adviser (find one that specialises in insurance here). "If you do it unaided, you could end up filling in a 30-page form, then waiting for a couple of months to be quoted twice as much as you expected without any explanation - and just decide not to bother," says Mr Carr. "The insurer won't tell you the reason for the jump in premium, which could just be that you're a little overweight. But an adviser will know what to expect." Find an IFA that that specialises in insurance
Couples can take out joint policies, which pay out on either death, although Mr Carr does not recommend it. A joint policy will pay out only once, after which the surviving partner would be uninsured; taking out a replacement policy would probably cost more because that partner would be older than when the original cover was taken out. "Steer away from joint policies," he says. "You would save only about 5 per cent on the cost of two separate ones, which really do give you more for your money. On top of this, you can vary the term and the payout between the two policies if you wish, while joint policies can cause problems with the taxman if they are written in trust." Mr Carr suggests that everyone considers writing their life insurance policies in trust, which is a lot simpler than it sounds and costs nothing. "There are three benefits. First, you can make sure that the money goes to the people you want. If not written in trust, the payout forms part of your estate and will be distributed according to your will, if you have one. Second, the beneficiaries - who you can change at any time during the term - will receive the payout more quickly. And third, the money will not be subject to inheritance tax. Setting up a trust has no real disadvantages and takes just a couple of signatures on a one-page form." As well as term insurance, there is also a type of policy called "whole of life". The difference is that this pays out whenever you die, as long as you keep paying the premiums. "The premiums are reviewable, so it gets expensive as you get older," says Alan Lewis of Lewkay Financial Services, an independent financial adviser. "It is normally used to meet inheritance tax liabilities." Meanwhile, if you took out a with-profits endowment to pay off an interest-only mortgage you should remember that the policies include life cover and that if you cash them in - because of poor performance, for example - you will lose your insurance and may find replacing it expensive, as you will be older than when you took out the original policy. Useful links | ||||||||||||||||||||||
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