It could cost as little as £5 a month, but timing is everything
Contemplating the financial future of our loved ones after we’re gone can be a daunting task, not to mention preparing for it. The prospect of an additional expense is hardly appealing, especially with mortgage rates on the rise again and living costs showing no signs of decreasing. Life insurance can often feel like a swindle.
However, Lorna Hopes, a financial adviser specialising in mortgages and life insurance at Smith and Pinching, argues that securing life cover early can make a significant difference. “Don’t keep it on that to-do list,” she says. “Make sure you’re looking at it, considering all your debts, what you’ve got, what you might want to protect, and the sooner you take it out, the better, because then you’ve got financial security for the future.”
What are the benefits of life insurance?
“Primarily, it gives out a lump sum if you pass away during the term of the policy. It’s giving financial protection for your spouse and dependents that can be used to pay off mortgages or any large debts,” explains Hopes. “It provides peace of mind that there’s financial protection, should the worst happen.”
Life insurance can be secured to cover a variety of things, even a child’s university fees. “If you want to make sure in the future that your children are covered for that cost, then yes,” says Hopes. “You don’t need to specify the reason you’re taking the cover out, you just need to make sure the sum assured is sufficient for whatever purpose you need.”
Additional benefits include the lump sum being “tax-free under current legislation”, and if you arrange cover at a “relatively young age, it can be quite inexpensive”. Indeed, for “people with no underlying health conditions, [taking it out] in their 20s can be relatively cheap. They could be looking at £5 or £6 a month for maybe just under £100k worth of cover, which is a good lump sum,” Hopes explains.
She continues: “Once you’ve taken the policy out, if you’ve got guaranteed premiums, those premiums won’t change. So even if you’re 50, and that’s how long you’ve written the policy to, you’re still paying that £5 or £6 a month, which the cost difference, if you took it out in your 50s, would be dramatically different.”
What are the drawbacks?
The primary drawback is that it can feel as though your cash is disappearing each month without tangible return. “If you don’t pass away during the term of the policy, you’ll have paid those premiums and you’re not actually getting anything back. It doesn’t build up any surrender value,” Hopes notes. It’s not a savings scheme, but rather protection in case of death.
Low monthly payments won’t suit everyone either. “The older you are, and if you do suffer from existing medical conditions, that can unfortunately make the premium higher, because you are more likely to make a claim depending on what you may have,” Hopes clarifies. Additional drawbacks might include that “some applications, when you submit them, might have exclusions or waiting periods, primarily related to medical conditions. They might say, ‘We’ll cover you, but not for depression or mental health,’ so if you passed away because of mental ill-health, they wouldn’t cover you for that.”
Who actually requires life insurance?
“Not everyone,” acknowledges Hopes. “If you’re a single person with no dependents, no debt to cover, it’s probably something you don’t need.” Everything hinges on your personal situation.
“It can be valuable at all [financial planning] stages, but usually it’s at that younger adult stage where you’re newly married, having children, getting a property, that’s when we really see the value of taking it out,” she adds.
Is cancellation possible?
Should you struggle with the monthly premiums, you’re not locked into life insurance. “Absolutely you can cancel it. You don’t get any cash back,” confirms Hopes. Furthermore, “if you’re fortunate enough to have made sufficient overpayments on your mortgage, or if you won the lottery or come into an inheritance, that kind of thing, you can cancel it”.
Do life insurance providers genuinely honour claims when required?
It can seem as though insurance firms make it deliberately difficult to secure payouts when something occurs, but Hopes maintains “as long as you’ve been honest and open during the application process”, this shouldn’t be a concern, provided you’ve chosen a reputable insurer.
“If you lie and say you’re a non-smoker to get cheaper premiums, and then something happens to you, and they go to your GP, and can see you were a smoker or had the nicotine patches on prescription, they know you’ve lied at that stage. That would be when they wouldn’t pay out,” she explains. “But if you’ve been open and honest at the start, and you pass away within the terms of the policy, it should pay out.”
What other information should you know about life insurance?
If you do arrange a policy, think about placing it in trust. “The benefits of writing the policy under trust is faster payment, because you’ll avoid probate,” says Hopes.
Typically you’ll need to complete an additional trust deed, which grants you greater control over the future lump sum. “You can specify, ‘I want it to go to my children but not until they’re 18,’ that kind of thing,” says Hopes.
“You’ve got a little bit more control over the money, even when you’re not here, typically under trust. Plus, it falls outside of your estate for inheritance tax purposes, subject to current legislation.” Also, for those who value their privacy, having it under trust means “it doesn’t become part of the public probate record, so the payout is not included in anything people might be able to see on your probate record after you’ve passed away.”
How can you secure life insurance?
Hopes suggests that comparison websites are useful if you’re well-versed in the subject, but “if you want holistic, all-round advice, speak to a broker or financial advisor, especially if you have things like diabetes or any illnesses. It can be invaluable talking to a broker, because they know which providers are going to be more sympathetic to those kinds of things and maybe not increase the premium or exclude you because of that”.
