Arranging life insurance cover

Arranging life insurance is essential if you have a spouse, partner, children or other dependents and you want to ensure that they are provided for if you are not around.

Why should I arrange cover?

Reasons for arranging life insurance may include:

Cover for mortgage repayments.
Childcare expenses resulting from the death of the primary carer
Cover for school or university fees
Replacing the primary earner’s salary
Repaying debts to prevent your loved ones from suffering financial hardship
Providing financial support for a business partner
Maintaining your family’s standard of living

How much cover do I need?

Working out who you need to provide for and why will help you to work out the total amount of cover you require.

As a general rule of thumb, a life insurance policy should provide a lump sum that’s at least ten times your current annual salary. In some cases up to 25 times your annual salary may be appropriate. However, the amount will vary depending on why you’re arranging cover.

Remember! If you are unsure about the amount of cover you need or the type of life insurance policy that’s right for you, always seek independent financial advice.

Who should the policy cover?

Again, this depends on the reasons for arranging cover. If, for example, a household has one primary earner and the other partner is responsible for the bulk of the childcare, it may make financial sense to cover both parties. This is because the death of the primary carer could leave the family in a situation where they have to pay for full time childcare, such as a live-in nanny; likewise, the death of the primary earner could leave the family without an income and facing financial hardship.

For joint policies there are typically two options:

Joint life first death policies - this type of policy pays out on the first death i.e. if either you or your spouse or partner dies first. Once the claim has been paid the policy ceases.
Joint life second death policies - this type of policy pays out on the death of the second policyholder rather than the first, providing it is within the term. If the first policyholder dies then there will be no payout.

Spouses and partners can take out separate policies but arranging joint cover can be a more cost effective option. Spouses can also arrange ‘life-of-another’ policies on each other i.e. a husband may insure his wife’s life and vice versa.

Who should benefit from the policy?

Policyholders often specify their spouse, partner, children or other dependents as their policy beneficiaries (those who will benefit if the policy pays out) however beneficiaries don’t have to be family members.

Who can sell life insurance?

Anyone selling life insurance has to be authorised by the Financial Services Authority or have an arrangement with an authorised firm. You can buy life insurance through a financial adviser, insurance broker, solicitor or accountant as well as through an insurance company.

By using an online comparison site you can compare quotes from a number of different insurance companies with one search. This enables you to compare prices and see what is included in each policy before you buy, enabling you to find the right level of cover at a price that’s right for you.

Remember! The cheapest quote may not provide the right level of cover for your needs. By paying a little extra for your insurance it is usually possible to secure better cover and therefore get better value for money.

What happens if I die?

If you die during the policy term the payout will normally be untaxed. However, the payout may be considered part of your estate, and as such it could push your entire estate over the threshold for inheritance tax. Essentially this means that the sum in excess of the threshold will be liable for tax.

To prevent this happening you have the option to put your policy in a flexible trust. This allows the proceeds of your life insurance to be paid to your beneficiaries in the quickest and most straightforward way, without reference to your estate and without being delayed by probate.

Remember! Placing a policy in trust can be complex therefore you should always seek advice from an independent financial advisor before proceeding.

« How life insurance companies calculate how much you pay