Life Insurance

Most people are hesitant to confront issues of mortality and often avoid taking out a life insurance policy. However, if you want to provide for your loved ones after you are gone, it is important to understand the intricacies of life insurance policies.

What is life insurance?

Life insurance provides coverage in the event of a death. Most Brits take out life insurance policies to pay for large debts such as a mortgage, or to provide financial support for their family when they are gone.

There are two major types of life insurance policies from which you can choose: term and whole-of-life.

Term life insurance

Term life insurance allows you to choose the amount you want to be insured for and the period of coverage. If you die within the term, the insurer pays out a lump sum to the beneficiaries you designated. However, if you do not die within the term, the policy does not pay out and the premiums are not returned.

There are four types of term life insurance policies:

1. Level-Term Life Insurance

   As the name suggests, a level-term policy pays out the same amount, irrespective of when you die during the specific term. The premium you pay generally remains consistent as well.

2. Decreasing-Term Life Insurance

   A decreasing-term policy reduces the payout amount over the term of the policy. These policies often charge significantly lower premiums than level-term plans. They are more suitable for debt that decreases over time, such as a repayment mortgage.

3. Increasing-Term Life Insurance

   As you might expect, an increasing-term policy is the opposite of decreasing-term: the payout amount increases over the term of the policy. This policy is suitable for combating inflation and acts as a built in buffer in case your life circumstances change, such as having to provide for unexpected children.

4. Family Income Benefits Life Insurance

   This policy pays a regular income instead of a lump sum upon the passing of the policyholder until the policy’s expiration date.

Whole-of-life insurance

This type of coverage pays out a lump sum when you die, as long as all payments are current. Unlike term insurance, this does not depend on a fixed term. Because of the guaranteed payout, whole-of-life policies are generally more expensive than term insurance. Even though they are more expensive, they often provide a greater degree of security for your family, e.g. paying for a funeral or an inheritance tax bill for a large estate.

Common exclusions

Life insurance policies, like most other forms of insurance, contain certain provisions that will exclude coverage. Fair or not, as a policyholder, this is the reality that you will have to deal with. The following circumstances may invalidate your coverage or cause an insurer to decline your application:

• Death resulting from drug or alcohol abuse.
• You have missed one or more payments.
• The death was due to suicide or self-inflicted injuries.
• The death was the result of the individual’s negligence or recklessness.
• If the death occurred as a result of war or terrorism.

Life insurance policy considerations

Let’s face it, finding suitable life insurance is a difficult task. Don’t fret if you feel overwhelmed, it’s perfectly normal. Here are some assorted tips that should make your experience a little easier:

• Make sure you verify the age limits on the life insurance quote you receive. Some policies may stop coverage once the policyholder reaches a certain age.
• Some policies have a cash-in value that you can redeem at a certain time. Check the fine print to determine if the policy you are considering has one.
• Carefully consider the tax implications for your life insurance policy. You may have to pay inheritance tax on any sum paid out unless your policy is put in a proper trust. This is a very complicated area due to the changing nature of tax reform, so make sure you consult a tax professional.
• Some policies may offer additional benefits that you may not be aware of. Make sure you consult the fine print on any life insurance quote you receive.
• Be wary of insurers that offer free gifts or initial coverage to attract new customers.
• Be wary of insurers that do not ask you any medical or health questions, or boast guarantees that your premiums will never rise.

Making a claim

Coping with the death of a loved one is very painful. While nothing can fill the emptiness you are feeling, the payout from your loved one’s life insurance policy can help make you financially secure for the rest of your life. Outlined below is a checklist to help ensure that your loved one’s policy is honoured.

1. Contact the insurer

   The first step is to recover the life insurance policy documents and contact the insurer. Don’t worry if you are unsure about anything, the staff are trained to assist people who are bereaved, so they will be very warm and helpful.

   The insurer will ask you to fill out the claim form and provide a number of documents, including an original copy of the death certificate, so make sure to request a few certified copies from the funeral company.

2. Mail the documents

   Once you collect all of the documents, you are ready to mail everything to the insurer. Make sure you use a recorded form of delivery in case there is an issue in transit. Assuming everything has been submitted properly, the insurer should payout no later than a couple of weeks.

3. Receive the payout

   Once the payout has been made, things can get a little more complicated depending on how the deceased put their affairs in order.

   If the policy was written in trust…

   This is the simplest situation. The pay out sum is able to be paid directly to the beneficiary on the trust document, and you can avoid any probate or inheritance tax.

   If the policy wasn’t written in trust…

   If the policy was wasn’t written in trust, then the life insurance policy pay out will go to the executors of the deceased’s estate. The executor will then enter probate, which is a legal process to determine an executor’s authority to administer an estate.

   Probate normally takes approximately 6 months to conclude, at which point the insurance pay out will be distributed following the execution of the will.

   If no will was created…

   If the deceased did not execute a will, then the payout will be given out according to the legal process known as intestacy.