The Basics of Life Insurance

The Basics of Life Insurance

The Basics of Life Insurance

Welcome back Guys. 

Today Catatan Baru going back to basics. It's been a little while since I've done one of these and apologies for that,  but today we're looking at life insurance.

Life insurance really has a place in everybody's  financial plan. As it says it covers your life so if you should pass away it would payout, and then that money could be used to clear a mortgage or to pay a lump sum to your beneficiaries, or to clear a loan - another type of loan other than a mortgage. 

So it really has its place  because it can cover different types of things should you pass away. There are many different  types of life insurance and really it depends on what you're trying to cover. Now you're obviously trying to cover your life, but for a lot of people the key thing they have life insurance for is  to cover their mortgage debt. 

Now depending on the type of mortgage you have that will  depend on the type of life insurance you need.  

If you have a repayment mortgage - so every time  you pay a monthly repayment you're slowly owning a little bit more of your house or your flat every  time you pay those monthly repayments - that means that ultimately your level of debt slowly  decreases over time, so by the end of the term the amount you will owe the bank will be £0 because  you would have been repaying it throughout the term of the mortgage and at the end of the at the  end of the term there will be nothing left that you owe the bank. 

If however you have an interest only mortgage - therefore your outstanding debt remains at a level sum the entire time - so at  day 1 you might owe £150,000 to the bank but at day 0 you also still owe them £150,000 and you  have to find some way to repay that lump sum, whether that's by selling your property or  finding a lump sum source from somewhere. 

But whatever you do you have to repay that debt. So there's a big key difference there in a reducing  

outstanding debt or a level sum of debt and depending on the type of mortgage you have that will dictate which type of life cover you need. 

For your decreasing debt you would be looking at a decreasing term assurance policy. 

You would set that up for the same term as your mortgage has, so if it's a 30-year mortgage term you would set your decreasing term policy up for 30 years and then the sum assured slowly  decreases each month as you pay your premiums.  

But it's important that the premiums remain level.  So the premiums will be the same throughout the term of the policy, it's the sum assured, which is  the amount that would be paid out on your death, that is what reduces each month in line with  your mortgage repayment or broadly in line, as in line as they can make it. 

If you have an interest only mortgage and you have that fixed sum that you need to repay on death then you would want a level term assurance policy, because the the amount that would be paid out would be the same whether you died on day 1 or day 300. 

It would be the same amount that would get paid out  and therefore your interest only mortgage could be covered. It's important you set the terms up if  you're covering a mortgage that the term is the same length as your mortgage term otherwise you'll  find, especially with decreasing term assurance, you'll find that the sum assured depreciation is  slightly out of kilter. 

I mean, they tend to be a little bit off but they can broadly be as close  as you can get them. 

But it's important to make sure you have the whole term of your mortgage  covered whether that's a repayment mortgage or an interest-only mortgage. The premiums of a  decreasing term assurance policy are cheaper than a level term insurance policy and that is  purely because the sum assured decreases every day that the the policy goes on for, whereas,  as I've said, the level term policy the amount that would get paid out is the same throughout the  term of the policy therefore the benefit is higher so the premiums reflect that. 

You don't have to  have a mortgage if you want level term assurance or decreasing term assurance. So you don't have  to attach these things to a mortgage. 

You could simply take one out if you wanted a fixed sum  to be paid out to your loved ones on death. You could take out a level term insurance policy for  £100,000 if that would suit your circumstances.  

Likewise a decreasing term assurance - that's  unlikely to be quite so suitable - decreasing term assurance policies are more suitable for repayment  mortgages - that's generally what they are for, but it is possible to set one up if you wanted  to do it for your own circumstances. 

Another key type of life insurance policy is called Whole  of Life. Now this basically has no end date - it  just runs until you pass away. But because  of that these can be very expensive policies.  

Because you could live to be 70, 90, 110 - the  insurer has no idea how long they're expected to cover your life for and so generally they are  quite expensive and in a moment I'll just give you a comparison for premiums in terms of a decreasing  term, a level term and a whole of life policy just so you've got a rough idea of the differences  in the premiums. 

Whole of Life is a key insurance policy for inheritance tax because what you  can do is, if you know you're going to have an inheritance tax liability you can take out a  whole of life insurance policy that will payout an approximate value of the inheritance  tax your estate is likely to pay.  

So you can set that up so that on the day you pass away the Whole of Life insurance policy would payout the benefit to whoever you nominate and then they have the cash proceeds straight away to be able to pay your inheritance tax bill. 

So now  I'll just give you some premiums - a rough idea, so you know exactly sort of what sort of premiums  you can expect to pay. 

For a healthy couple in their mid-30s wanting £100,000 of life cover  the premiums would be approximate as follows:  

for decreasing term assurance you'd be looking at about £8 per month over a 25-year term and that is on a joint life first death basis. So what that means is for £100,000 of decreasing term assurance cover, so the day you take the policy out is worth  £100,000 but that will slowly decrease every month you pay your premiums until the end of the policy and the sum assured would be effectively £0.  

So it's a 25-year term policy so after 25 years  have passed the policy would just come to an end if it's not being claimed on. And joint life first death means that for a couple, the first person to pass away the pay out would be  made and then the policy comes to an end. 

You can have joint life second death, so for a couple it would only payout on the second of the couple to claim/pass away within the term of the policy.  

Typically mortgage cover is done on a joint life first death scenario because you would want the mortgage to be cleared if the first person of a couple were to pass away so the remaining person  doesn't have to cover the mortgage payments. 

For a level term assurance policy, for a healthy couple in their mid-30s for £100,000 you'd be looking at just less than £10 a month over a 20-year term  for joint life first death. So not much difference there but the term is slightly shorter by five years, the premiums are slightly more expensive and the joint life first death is the same. 

So level term assurance is slightly more expensive than decreasing term assurance. Now here's the big  difference is the Whole of Life - so for a 30 year old couple wanting £100,000 of cover on joint life  first death you'd be looking at around £95 per month. 

So you can see there the massive disparity between £8 a month for decreasing term assurance, £10 a month for level term assurance and £95 a  month for Whole of Life. 

But these are indicative only just to give you an idea of the different types of cover and the different types of premiums you would have to pay. Generally Whole of Life is done on a joint life second death if it is for inheritance tax mitigation because the inheritance tax bill would usually be due on the second death, because for a spouse - spouses tend to leave their estate to each other and in that scenario there's no inheritance tax bill, so it's generally then when the final spouse passes away that the Whole of Life policy would payout. 

Life cover tends to have Terminal Illness cover included in it and that means that if you have an illness  that has less than a 12 month life expectancy generally the policy would payout even though you're not yet deceased, but you would have to have a doctor sign to say that they believe your  life expectancy is less than 12 months. 

You can also include waiver of premium for these sorts of policies so that means if you're out of work for a set period of time and you can't afford your premiums, you can notify the insurance provider and they will either cover your premiums for you or waive them for a set number of months so that your policy still remains live, because if you stop paying your premiums it means your policy will lapse and you just won't have any benefit if you pass away, so it's really important you keep those premiums up if you want  your policy to continue. 

You can also hold these sorts of policies in trust so that is important for the Whole of Life because if you don't want to add more money into your estate - you want to make sure it's moved out of your estate - so it is important to put Whole of Life policies in trust for other people, and certainly that can be helpful in terms of speeding up the process of having money paid out because it means that money then doesn't have to go through your estate to be paid out to your beneficiaries - it can go straight to your beneficiaries and it certainly speeds things up and you don't have to wait for Probate to be passed. 

That's all guys. I hope that's been helpful and I'll see you next time.

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