Your Financial Protection
Life insurance, critical illness, and income protection can all be complex products, with several exclusions, however it is necessary in life for if or when the inevitable happens.
What is life insurance?
Life insurance is a type of cover that you can take out to protect your loved ones, yourself or something valuable to you. There are three main types.
There is ‘Standard Life Insurance’, which will pay out to your dependents in the event of your death. ‘Critical Illness Insurance’ will payout to you if you have a serious illness such as cancer, stroke, or heart attack. Lastly, there is ‘Income Protection Insurance’, which will payout if you’re sick and unable to work.
The three types of life insurance I’ve just mentioned are listed from least expensive to most expensive. Life insurance is the cheapest because people are now living longer. Critical illness is the next most costly because more and more people are getting critical illnesses due to increased life expectancy. And income protection insurance is the most expensive because it requires you to be sick and unable to work before it pays out.
What level of cover is appropriate for a person looking to take out life insurance?
With life insurance, it depends on if you have an actual ‘asset’ you’re trying to cover. For example, people usually tend to think about life insurance when they’re getting a mortgage and may get life insurance to cover the mortgage term.
I always encourage people to think carefully about their dependents and the people they’re likely to leave behind. For example, let’s say you’ve taken out life insurance to cover just your mortgage payments. In the unfortunate event of your death, yes, your mortgage might be paid off, but how will your dependents continue to live if you’re the primary breadwinner? This is where we need to start thinking about an income amount that your dependents are likely to need.
Depending on your lifestage, a multiple of your annual income might be most appropriate, say 10, 20 or 30 times, but this will also depend on your budget. Usually, I would recommend a minimum of 10 times the required actual income.
What is a 'term policy'?
If you want to leave an income for your family over a fixed period, there’s a product called ‘Family Income Benefit’. For example, a family with young children could take out a policy that would pay out £10,000 a year until their youngest child reaches age 25. This amount could either pay out annually until all children reached age 25 or paid out in a lump sum.
Should people be looking at single or joint life insurance policies, particularly around mortgages?
It depends on why you are taking out the policy. For example, if you’re a couple planning to take out a mortgage, then it makes sense to take out a joint policy because if something happens to one of you, your mortgage will be paid off.
However, in addition to mortgage cover, I do advise my clients to consider individual cover. This is to ensure the maximum amount of protection possible. So if, for example, I was married and my wife and I had joint cover, in the event of my death, she would get a payout, but in the event of her death, any dependents we might have would not. So this is why it’s worth looking at individual policies.
So how do payouts work in practice?
I always recommend that my clients put their insurance ‘into trust’. This avoids clients having to go for ‘probate’. I’ll explain.
An insurance policy written into trust can be immediately paid out by the insurance company to your trustees, based upon the instructions you’ve given whilst you are alive. It’s relatively quick.
If the policy is not in trust, it will be paid into your estate, and you will have to undergo a legal process to release the money called probate. The executors of your estate will also have to be assigned – which can take a while – and while all of this is going on, nobody can get access to the money.
Finally, if the money is in your estate, if it is over the £325,000 inheritance tax threshold, then you could lose 40% of any money over this amount to tax.
What affects the price of life insurance? What makes it cheaper versus more expensive?
One of the main factors is your age. I always get the question,”Should I get life insurance young?” and my answer is “Yes!”. The younger you are, the more healthy you are and the less likely you will fall ill, the cheaper the insurance.
Also factored in is your health, so insurers will look at your weight, BMI, whether you’re a smoker or not. Things like being overweight or being a smoker can increase your premiums.
Is there anything that can affect the cost of life insurance outside of your health and age?
Yes. Life insurance that covers you for a set period of time is called a ‘term policy’, and insurance that covers you until you die is called a ‘whole of life policy’. Term policies are cheaper than Whole Of Life policies because they only have to cover you for a specific period of time. So I advise clients at an earlier life stage to consider taking out a term policy and then to consider switching to a whole of life policy when they get a bit older. As you’d expect, the shorter the timespan you take out the cover for, the cheaper the policy and vice versa.
Can you switch life insurance providers if you see a cheaper deal or if you're unhappy with the service?
Yes, you can, but it’s not a ‘switch’ in the same way you’d switch a current account – you’d have to set up a brand new policy and then cancel the old one. Again you have to consider your age. If you’re older and you decide to take out a new policy, or if you’ve developed any health issues since taking out the first policy, then potentially the price could go up.
My advice is not to cancel your current policy until you’ve completed the underwriting process with the new one. But, of course, you must also make sure that the price you’ve been quoted is the actual price you’re going to pay at the end of the process.
What happens if the life insurance provider you're covered by goes bust?
Life insurance is protected by the Financial Services Compensation Scheme (FSCS). If the provider goes bust, you will be able to claim compensation for 90% of the cover owed.
Lastly, finally, how can people get life insurance with Emmanuel Asuquo? (you!)
I can provide people with consultations and quotes for life insurance. We can look at the specific type of cover you’ll need, your available budget and how long you might need the cover for.
I also work with specialists and can help clients in need of specialist or niche types of insurance. This includes clients that may have already had a heart attack but still want to get some cover if anything else was to happen or people that have conditions such as HIV at the time of taking out a policy.