Life Protection Insurance (LPI) is not required by law, but often means the difference between financial security and distress following the death of a family’s chief earner or sole provider. It is wise to take out LPI if:
– You have dependants who rely on you for income
– You have debs and loans your family or dependants could not repay if you did
– You act as guarantor on a mortgage for someone
There are other factors to consider when choosing the scale of the policy you wish to take out. For example, if you have young children they would be better covered if there was provision within the policy for the amount to last over a longer term. You should consider extra benefit if:
– You have loans
– You want to cover the cost of college education for your children
The length of time you want the cover to last is known as the ‘term.’ With a young family to provide for, it is often desirable to have the insurance designed to last until the youngest child has left school or college. It may last as long as 25 years in the case of a young family, or ten years if your family is older.
If you require cover that pays out regardless of when you die, you will need whole of life insurance. This is a fixed policy, with a pre-agreed term and cover amount. You pay the same premium for the life of this sort of policy, unless you buy index-linked insurance. Indexed linked insurance increases cover in line with inflation each year. This takes into account the increased costs of living over a given period of time, allowing for a more meaningful pay-out to your dependants in the event of your death. Typically, your cover rises by between 3 per cent and 5 per cent to keep up with inflation. Many policies are index-linked automatically. If you do not want to take this optional extra, tell your insurance provider.
How does Life Insurance Protection work?
If you take a policy out on your own life, the amount of the policy is paid directly to your estate, or to the named beneficiary. If your spouse or partner takes out a policy on your life, the benefit could be paid to them without going to your estate. If you have a joint life policy, the benefit is usually paid to the surviving policyholder named on the policy. The amount is paid as tax-free lump sum, but anyone who inherits the money after your death may be liable to inheritance tax, depending on their relationship to you. However, you can buy life insurance policies that provide a tax-free lump sum to cover any inheritance tax liabilities that your beneficiaries may have when you die.
A standard premium usually covers terminal illness as well as death, but you should check with your provider. In this instance, the policy will pay out a proportion of the policy benefit if you are diagnosed with a terminal illness. The remainder is paid out upon your death. An advantage of this is that getting most of the benefit in advance could help pay for any medical costs you have.
There are a host of other extras you can opt for when taking out LIP, so it is best to discuss your options at length with your provider.
The amount of your policy will depend on the state of your health and your age. Insurers require you to answer detailed questions about your general health and lifestyle. Dishonesty is quite serious in this case, as any incorrect facts may potentially invalidate the policy. If you smoke, declare it; if you quit, declare that, too.
The amount of your premium varies, depending on what you want to get out of it in terms of length and benefit. However, premiums are always highest for people with the following risk factors:
– Age – the older you are, the more you will have to pay as the chances of death increase with age.
– Smoking – it is not unusual for smokers to pay double the premiums of non-smokers due to serious health risks brought on by smoking
– Your general health (current and past) – if you have a medical condition or have a family history of certain illnesses or early death, your premium will be higher than average
– Work and lifestyle – your premium may be increased if your work or lifestyle put you at greater risk of dying early or suddenly
Not everyone needs life insurance. For instance, there may be no benefit in taking it out if:
– You have no dependants
– You have death-in-service cover from your employer or through your pension plan
– You have enough money for dependants to thrive without it