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Life cover pays out a tax free lump sum of money if the individual(s) insured dies within a certain time period i.e. during the term of the policy.
It is a tax free sum and it can be used for a number of reasons. For example:
To protect your loved ones financially if you die.
Ensure the financial survival of your business, in the event of the death of a key employee or director.
Repay your mortgage.
This is also called Term Life Insurance. With this policy, you choose how much life cover you would like (Sum insured) and how long you would like the cover for (the Term). You can insure one person or two people on this policy. If the person insured dies during the term of the policy, a pay-out is made and the policy ceases. If you do not die before the end of the term of the policy, the policy will also cease. There is no savings element to these policies.
Peter & Linda have two children under 4. They want to protect their family’s financial security in the event of one of them dying. They start a Level Term Life insurance plan for 25 years. They decide on a level of cover of € 300,000 . In year 22, Linda has a major stroke and dies. The life insurance company pay out € 300,000 to Linda’s estate. The policy has now ceased.
Convertible Term Life Insurance is similar to Level Term Life Insurance but with an added benefit. This type of cover gives you whatâ€‹ is called a ’Conversion Option’. This allows you to extend the cover beyond the term at any time before the expiry of your existing policy without medical underwriting.
In effect, you are setting up a new life insurance policy without having to supply any medical information. It is slightly more expensive than Level Term Assurance as you are paying a higher premium for the option of extending your cover in the future regardless of your state of health.
Philip and Louise have a Convertible Term Life Insurance policy with 2 months remaining. Louise has been diagnosed with breast cancer and is very seriously ill. They use the conversion option on the policy to start a new policy for another 20 years. The insurance company do not look for any medical details - they assess you based on your health when the original policy was taken out. The premium payable is based on their current age. Philip & Louise now have the peace of mind of knowing that they still have life cover.
A more comprehensive form of Life Cover with no specific term: you are covered until you die, as long as you pay the required premium. They are often used as a means of reducing inheritance tax liabilities. The main difference here is that the premiums are not guaranteed. So, the insurance provider reserves the right to review the premium on the policy at set intervals, usually every 5 years; but in the later stages, this can be as often as every year.
Life policies are available on a Single Life basis, a Dual Life Basis or Joint Life basis.
Single Life Cover
This is taken out by one person and is payable on their death over the term of the policy.
Join Life Cover
As it suggests joint life cover is taken out for two people and is payable on one death within the term of the policy. Most joint life policies are set up on a Joint Life First Death basis. This means that the policy will pay out after the death of either one of the people covered. When the claim is paid, the proceeds will be paid to the other policy holder. As there is only the potential for one payout, there can only be one sum insured, i.e. the two lives cannot be covered for different amounts. Once a claim is paid, the policy ceases.
Dual Life Cover
Similar to Joint Life, this is taken out by two people. The fundamental difference is that a claim can be paid on both deaths. If one person dies, the policy continues in the name of the survivor. Also unlike joint life cover, both lives can be insured for different amounts of cover if required.
Indexation is an optional benefit that allows you to increase your life cover each year in line with inflation. This means that the level of cover that you have will increase each year by a certain percentage. Your premium will also increase each year and the rate your benefit increases is lower than the rate your premium increases. For example, Royal London increase your benefit by 3% and your premium at 4%. Each provider has different rates of indexation. You can opt out of the indexation at any stage during your plan.
1. How much cash should be readily available?
2. What sort of income will your family require?
3. How long do you think your family will require cover?
4. Think about any cover you have already arranged. Affordability is key