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Life Insurance Guide

Introduction

Talk to any financial adviser and the first thing he or she will tell you is that, before you do anything else with your money – invest it, start a personal pension with it, buy a house – the first and most important step is to protect what you already have.

In other words, insure against things happening that may have a negative impact on your life or that of your dependents.

Unless there are no dependents, the most important form of cover is generally considered to be life insurance. After all, you need to make sure that if anything happens to you, your loved ones are protected.

How much life cover?

The simplest calculation, one adopted by many salespeople, is simply to multiply each family income-earner’s salary by 20.

This is because it is estimated the lump sum available from the life insurance policy will deliver an income of about five per cent without too much risk of erosion of capital. Both partners in a relationship take out cover in relation to their own earnings.

The problem with this approach is that it is slightly hit-and-miss. For example, you might want to take into consideration:

• Immediate and additional expenses after death, including funeral expenses and legal costs
• Any insurance already available through work
• The effect of a spouse’s death on the remaining partner’s income, especially where children are involved. There may be nanny’s fees involved, for example
• Additional investments, including any pension, set aside for this possibility
• Whether the mortgage will be paid off as a result of separate cover, perhaps through an endowment policy or similar

A more sophisticated approach is to use calculate current income and expenses, mortgage and other assets, plus whatever existing protection you have, adding and deleting various items as above, before coming up with a sum that you need to protect yourself for.

What type of cover

There are two main types:

• Whole-of-life

• Term assurance

Whole-of-life

This is a policy where, as long as premiums are kept up to date, a payout will be made. In other words, the protection is not for a fixed period but can last indefinitely, subject to regular reviews, which generally take place every five or 10 years.
Premiums are invested in the stock market, after taking out expenses and the provision of immediate cover. In the past, good stock market performance meant there was a decent chance that premiums would stay the same or, in some cases, even fall.
But this is less likely to be the case today. Share price volatility can mean that premiums going forward are much higher at review times and often become prohibitive as people reach retirement age.

Term cover

This is now much more common. Again, this is a simple policy to understand: you insure your life for a set number of years for an agreed amount. If you die, the policy pays out. If you don’t die, the policy lapses at the end the term.
As mortality rates have improved in the past decade or so, the cost of term cover has fallen. This means that if you took out term assurance as little as five years ago, you should seek out a fresh quote: it may well be cheaper than what you are paying now.

More pages

Page 1: Introduction
Page 2: Family income benefit (FIB)

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