Life insurance pays out to your estate in the event of your death in the form of a single lump-sum pay out and/or a monthly sum to replace your income. These policies can provide critical financial support to your loved ones at a difficult time and keep your family afloat without your income every month.
Life insurance is a widely adopted form of insurance, but there remain many misconceptions about life insurance policies, how they work, and whether they are worth the expense. Here we go through six popular myths about life insurance to help you separate the facts from the fiction.
The cost of life insurance varies due to a variety of factors from the age and health of the policy holder to the size of the payments made upon their death. In general, life insurance becomes more expensive with age as in the broadest terms the older the policy holder becomes, the less healthy they are likely to be and the higher the chance of them becoming ill or dying during the life of the policy.
Some advisers encourage you to look for a payout that is six to ten times your annual salary, so if you earn £50,000 per annum, you would specify a “sum assured” of £300,000-£500,000. The cost of policies range from just £10 per month upwards, so they can be very affordable, particularly for younger, healthier people.
Some insurance firms will ask you to complete a full medical exam before offering you a life insurance policy, but many do not. If you are young, healthy, and in a low risk group, insurance firms may simply ask you a few questions about your health and lifestyle to come up with a risk assessment for you and a fee for the policy cover without the hassle of going through a full medical. On the other end of the spectrum, those with a pre-existing condition or poor health might opt for a policy with no medical and few questions to give themselves a better chance of being approved for the cover. Either way, you will not need to complete a medical to gain life insurance cover if you do not want to, but choosing a policy that does not require such a test may impact the cost and assured sum available to you.
Whether you need life insurance is a personal question and has as much to do with your tolerance for risk as anything else. If you are young, single, and have no dependents then it may well be the case that life insurance is not a product you need, but if you have a family or other people that depend on you and your income, then a life insurance could provide for them if something happened to you.
If you are young and healthy, then you could get coverage for under 40p per day, and if you have a family or dependents then this money could be a wise investment for their futures. Moreover, if you added critical illness cover to the policy, then you could also be covered if you were struck with a severe or terminal illness, making your finally years or months a better experience, even if you are on your own. However, if nobody is relying on you and you are happy to roll the dice that you will not be affected by a serious illness in the near future, then it may be that you might be better choosing to spend that £10 per month on something more fun.
Many people take out life insurance policies alongside their mortgage with the help of their financial advisor, but this coverage is not compulsory. In reality, however, if you are buying a house with a partner then you may want to take out life insurance at the same time as the mortgage to make sure that the mortgage will be paid off in the event of your death, so that your partner will not struggle to pay both halves of the mortgage or face being evicted if you do pass away.
Insurance firms may check your credit history when you apply for life insurance, but your credit score, whether high or low, should not have an impact on the policy you are offered. This is because, if you do not pay your insurance premiums, the policy will lapse and you will no longer be covered. The insurance firm will not lose out if you fail to pay, so it is not in their interest to focus on your credit.
Money paid out from a life insurance policy is free from both income tax and capital gains tax. However, it may be subject to inheritance tax if the total value of your estate is above the threshold of £325,000 (or £500,000 including the family home). You could avoid being charged inheritance tax on the payout if it is setup as a trust. You should speak to your financial advisor if this is something you would like to explore.
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