What is Life Insurance and why do I need it?

Life Insurance, otherwise known as Life Assurance or Term Assurance is a great way to protect your spouse, children or business partners from the financial worries and stress that could happen if you were no longer there to help and support them.

Legally, life insurance is a contract between you and an insurer. It could pay out a cash sum if you die during the length of the policy. Life insurance puts money in the hands of those who need it when a person dies.

Reasons for needing Life Insurance

There are many reasons why this money might be needed, including:

• Paying off a mortgage (or other loan) if a borrower dies.
• Protecting a family against the early death of a spouse, partner or parent, particularly important for people with financial responsibility for children.
• Paying for a funeral.
• Paying inheritance tax (IHT).
• Protecting a business against the financial consequences of the loss of its owner or a key employee.

If your income would stop upon your death, and you have people who depend on you financially, you should have life insurance cover. If you live with a spouse or partner and their earnings would also stop at death, they too should have insurance cover. However, if you do not have financial dependents, it is unlikely that you will need life assurance.

What type of Life Insurance do I need?

Term assurance, sometimes called temporary insurance, is the right sort of cover for most types of family protection needs. It provides insurance at the lowest cost for the period that it is required.
It is rare that you would need other types of life insurance for family protection, because they generally involve much higher costs than term assurance to provide comparable levels of cover.

Term insurance is the simplest form of life insurance, working in a similar way to your house insurance. The policy will pay out if you die during the term, but if you survive to the end of the term, the contract simply ends and there is no pay-out.

What is ‘Whole of Life’ Assurance?

Whole of life assurance provides cover for the whole of your life, as the name implies and its main use is in inheritance tax planning and provision for funeral expenses. Endowment policies are essentially savings products with some added life assurance and they can be used for repaying mortgages, although they are much less widely sold than they were in the past. Both whole life and endowment policies can have substantial investment values that you can cash, unlike term assurance policies.

Different types of Term Assurance:

• Level term – These polices pay out a fixed sum if you die during the term of the policy.
• Renewable or convertible term – Some policies are renewable, so that you can extend them for an additional period of cover at the end of the term regardless of your state of health at the time, while others are convertible to a whole of life or endowment policy regardless of your health. These policies cost more than level term assurance.
• Increasing term – Some policies have an element of inflation proofing. You either have the option to increase the cover from time to time by a set percentage, or in some cases, the amount of cover increases automatically by a set percentage or perhaps the rate of inflation. These policies also cost more than level term assurance.
• Decreasing term – This is like level term but the amount of cover reduces each year. Decreasing term is typically used to cover a liability that you expect to decrease year on year, such as paying school fees until a child reaches the age of 18. The cost of this cover is less than level term assurance because the overall amount of insurance provided over its lifetime is lower.
• Mortgage protection – This is a type of decreasing term assurance but the cover reduces in line with the outstanding capital on a repayment mortgage where you pay off some of the capital every month. The higher your mortgage interest rate, the more slowly the outstanding mortgage capital falls each year. It is important to ensure that the interest rate specified in the policy matches the mortgage it is intended to cover or that the rate is higher than the interest rate you expect at any time during your mortgage.
• Family income benefit – This type of policy pays an annual sum if you die during the term of the policy and the payments continue until the end of the term. Family income benefit can provide the highest initial cover for the lowest cost because it is effectively a form of deceasing insurance.

When it comes to Life Insurance it is essential that the right people get the right amount of money and financial support, at the right time. To ensure you and your family are protected, speak to one of expert Acumen Financial Partnerships Financial Adviser’s today – Free of charge.

Tel: 0151 520 4353. Email: info@acumenfinancial.co.uk.