The beneficiary is the person you choose to receive the insured sum if you die during the term of the policy — for example you may choose for your spouse, child or other family member to benefit from your policy. You can choose to have more than one beneficiary.
Critical illness cover
Critical illness cover is offered as an add-on for life insurance policies — if you are diagnosed with one of the ‘defined’ serious illnesses specified by your insurer during your policy’s term, your insurer will pay a set amount to help support you and your family during your illness. Critical illness cover is an example of a living benefit, meaning you do not have to die for a sum to be paid out.
Death in service benefit
A death in service policy is a benefit often offered by employers. The policy will usually pay out a multiple of your salary to your chosen beneficiary if you die while employed by the company.
Joint life insurance
Those with a shared financial interest (most commonly couples) can choose to take out a joint life insurance policy or two single policies. If you decide on joint cover you may benefit from cheaper premiums and less paperwork, but you should be aware that a joint policy will only pay out on the first death. This can cause problems if you and your spouse die at the same time — only one payment will be made whereas two single policies would result in two lump sum payments. The surviving spouse would also be left without cover after their partner dies, so would need to take out a new policy if they want to be covered.
Inheritance tax is due on the value of your ‘estate’ – all your possessions including money, belongings, and property – above a threshold of £325,000, levied at 40% unless you leave everything to your spouse or civil partner. If the value of your estate is more than £325,000, tax is due only on anything above that sum. Proceeds from life insurance are counted as part of your estate.
The premium is the amount you pay your insurer for your policy, usually broken down as a monthly payment. It is possible to get life insurance cover for a premium as low as £5 per month.
Term Life Insurance
This is the most common form of life insurance & when you take out a life insurance policy, you will be asked to decide on a term — how long you want the policy to cover you for. This typically falls into three main types:
- Level term
- Covers you for a set sum that remains the same during the term. You pick the size of the pay-out, known as the ‘sum insured’ and an amount of time you are covered, called the ‘term’. Both the sum insured, and the premiums are fixed with a standard level term life policy. If you do not die during the term, your policy lapses and you will need to take out a new life insurance policy.
- Decreasing term
- Is usually taken out to ensure a specific debt is covered – usually a mortgage. If you are steadily paying off your mortgage, in the event of your death your dependants would need less money to cover what remains of it as time goes on. Decreasing-term life insurance ensures that if you die, your loved ones are covered for the outstanding debt.
- Increasing term
- Where the pay-out increases over time to keep pace with the rising cost of living. The sum assured either increases by a fixed percentage each year or is pegged to the Retail Price Index. As the amount of cover increases over time, premiums are more expensive than other types of life insurance.
By setting up a trust you can avoid inheritance tax and bypass probate in certain cases. A trust is a complex financial product, so we advise you speak to us before deciding whether this is the right approach for you.
Single life insurance
A single life insurance policy covers an individual, rather than a couple who can be covered by joint life insurance. The chosen amount of cover is paid out if that individual dies within the life insurance term – the length of time the policy is set for.
The sum insured determines how much your cover will pay out to your beneficiary if you die within the policy term. You decide how much to cover yourself for — you may choose an amount that will ensure your family can pay the mortgage in the event of your death, and you may want to take into account their living expenses and any luxuries. For guidance on how much cover to take out, read our guide: How much life insurance do you need?
Waiver of premium
Some life insurers offer the option to waive your premium in certain circumstances, meaning your insurance policy stays in place even if you can’t pay your premiums because poor health has prevented you from working, for example.
Whole of life insurance
As the name suggests, whole of life insurance provides cover for your whole life, rather than a set term. Whole of life insurance will pay out when you die, no matter when that is, as opposed to term insurance that only pays out if you die within the policy term. Because of this added protection, whole of life insurance tends to be more expensive than term insurance.