Can your family or business cope financially if you should die early or unexpectedly?
Life insurance is the answer. It provides financial protection to help your family or business to manage after your death. The peace of mind which life insurance brings helps you to formulate clear plans for the future.
Common Reasons why having Life insurance is important?
- To Pay Final Expenses after death
This includes the cost of a funeral and burial which can easily run into the tens of thousands of pounds and you don’t want your wife, parents, or children to suffer financially in addition to emotionally.
- To Cover Children’s Expenses
You want to be sure that your children are well taken care of and can afford a further education like college or university. For this reason, additional cover is an absolute essential especially when kids are still living at home.
- Replacing your Spouse’s Income
If your spouse passed away while the kids were young, you would needed to replace their income to maintain the essentials of the family’s lifestyle and cover everyday living expenses. You may also need help with domestic tasks like cleaning the house, laundry, cooking and helping with schoolwork.
- To Pay Off Debts
In addition to providing income to cover everyday living expenses, your family would also need insurance to cover debts like the mortgage so they wouldn’t have to sell the house to stay solvent.
- To Buy a Business Partner’s Shares
If you are involved in a business partnership, you need insurance on your partner’s life. The reason is so if he or she dies, there will be enough cash to buy his/her interest from his/her heirs and pay their share of the company’s obligations without having to sell the company itself. This would also apply to the business partner and they would also have the same needs (due to the risk that you might die), and so they also need to simultaneously purchase insurance on your life
- To Pay Off your Estate Taxes
Paying off an estate’s taxes can been quite expensive, so having insurance in place to pay them is essential to avoid selling other assets or funds that you may have built for your retirement. Using life insurance for this purpose is most common especially if the estate is a large one, and uses whole (rather than term) insurance to ensure that cover remains until the end of life.
Advantages of Life Insurance
The advantages of having life insurance are:
- Life insurance provides an immediate injection of cash for dealing with the financial consequences of the insured person’s death.
- Unlike any other financial products life insurance enjoys favorable tax treatment as any death benefits are generally income-tax-free for the beneficiaries.
- Death benefits may also be tax free for the estate if the property is jointly owned. Cash values also grow tax free during the insured’s lifetime.
- Some life insurance policies may be exchanged for another life insurance policy (or for an annuity) without incurring taxation. Please Note: All of the above statements are generally true; however the tax benefits of life insurance have certain limitations which under the different set of circumstances can cause the tax benefits mentioned to be lost. Please discuss your life insurance requirements with a tax adviser as tax rules are changing.
- Many life insurance policies are flexible and can be tailored for your needs. For example the death benefit may be decreased at any time to reduce premiums, some may allow premiums to be skipped and death benefits increased.
Disadvantages of Life Insurance
The disadvantages of having life insurance include:
- Additional monthly expenditure to pay for the policy premiums.
- Life insurance is typically purchased for the benefit of others and usually only indirectly for the insured person.
- Cash surrender values are usually less than the premiums paid in the first several years of the policy and a policyholder may not recover the premiums paid if the policy is surrendered.
- Purchasing life insurance and how to position it can be complex especially if the insurance is for estate planning, business situations or complex family situations.
- The life insurance acquisition process can be daunting (e.g. finding which life insurance company or policy is appropriate for you. What if you have pre-existing medical conditions? etc.)
Life Insurance as Protection – Term Insurance
Term insurance (also known as “temporary insurance”) provides financial protection if you die within a specified period known as “the term”. This period might be 10, 15 or 20 years although you can arrange policies to cover you for periods as short as one month. If you are alive at the end of the term no payment is made.
Term insurance is the cheapest form of protection. For just a few pounds a month your dependants or business colleagues can be covered for several thousand pounds.
The sum insured reduces by a fixed amount each year, decreasing to nil at the end of the term. These policies are usually used to cover a mortgage or other loan and they pay any outstanding repayment if you die early. Remember, though, at the end of the term nothing is payable.
The sum insured increases each year by a fixed percentage of the original sum insured. These policies are designed to increase your insurance protection as your earnings increase or against inflation.
Family Income Benefit
If you die during the term of the policy a regular income is paid to your dependants for the rest of the term. The income can be paid monthly, quarterly or yearly. Some policies provide an income which increases each year at a fixed rate – say by 3% or 5%.
Most life policies have optional extras such as:
- Waiver of premium
- 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.
- Disability Benefit
- The sum insured is payable if you become permanently disabled. There is no further payment on your subsequent death.
- Critical Illness Cover
- The sum insured is paid out if you are diagnosed as having contracted one of a specified range of critical illnesses.
- Increase Option
- The sum insured increases annually in line with inflation or by a fixed percentage.
Life Insurance and Taxation
Provided your policy is a “qualifying policy” the benefits paid are not subject to income tax. To qualify, a policy has to satisfy certain statutory conditions.
These include providing a minimum sum insured payable on your death. Also, premiums have to be payable at annual or shorter intervals for at least 10 years or until your earlier death. If you are a higher rate tax payer and surrender the policy within the first 10 years, some income tax may be payable.
Life insurance on Limited income
Young people on perhaps a limited income find that term insurance is the best buy. The term can be chosen to cover the time when children are growing up and expenses are high. Some families find a regular income more useful than a lump sum. For them a family income benefit policy is best.
Life insurance with House Purchase
With life insurance any outstanding mortgage is fully repaid should you die. Under a repayment mortgage your payments are part interest and part repayment of the loan. Decreasing term insurance ensures that if you die before the end of the mortgage term, the outstanding amount is fully repaid.