Is Life Insurance Necessary

Copyright (c) 2010 Steve Wentworth

This article is aimed to provide help on life insurance in general. After reading this you should have a good understanding of which life insurance product would best suit your circumstances. However it is recommended you seek independent advice to ensure your insurance product does as you intend it to.

What is Life Insurance
Life cover is an insurance product which provides a cash sum if the life assured were to suffer loss of life. The policy maybe taken either joint life first death or on a single life basis. The policy owner must pay regular premiums to the insurer. Unlike home or car insurance the policy owner is not taking out cover to protect a known valuable of tangible value. Rather the policy owner is protecting the family, mortgage or dependents from the consequences of the life assured suffering death. There are many variations of life insurance/life assurance, each having an alternative purposes for use.
1. Level term insurance
2. Reducing term insurance
3. Whole of life

Term insurance
A type of life insurance were the policy owner receives cover from the insurance provider on the life assured for a specified number of years. The policy owner may choose a term to suit their circumstances but must be above 5 years, typical terms are 10, 20, 30 years.

Level term insurance
Level term insurance is taken out for a fixed amount of cover say £100,000. This amount remains constant at £100K for the whole term of the cover. so if the life assured suffered death the proceeds would payout as a lump sum the entire £100,000.

Reducing term insurance
Reducing term insurance is taken out with an initial amount of cover say £200,000. The cover amount reduces to £0 throughout the term of the cover. This type of cover is an ideal protection for a capital and interest repayment mortgage. If the life assured were to suffer loss of life at some point within the term of his/her mortgage and life insurance term the payout would be enough to clear the balance of the remaining mortgage. Therefore removing this debt for the remaining family.

Whole of life
Unlike term insurance this type of life insurance is not restricted to a period of time for the sum assured to suffer loss of life. Subject to a valid claim the insurance provider is guaranteed to payout on death of the life assured. Monthly premiums must be continuously paid, therefore the longer the survival the more premiums are paid. If the life assured suffered loss of life after the initial two years the insurer will payout the claim. This type of insurance is ideally used to cover funeral arrangements, or to cover an inheritance tax liability.

Additional features
There are a number of additional features offered by life insurance companies in connection with a life insurance policy some of these are listed below: -
1. Terminal illness cover
2. Critical illness cover
3. Waiver of premium
4. Trusts

Terminal illness cover
This should NOT be confused with the more comprehensive critical illness cover discussed later. Terminal illness cover means the insurer will payout the sum assured if the life assured is diagnosed with a terminal illness having less than 12 months to live. Therefore the insurer will effectively payout the death benefit early allowing the remaining time to be a little easier. There are often restrictions on this benefit, whereby the policy must not be in the last 18 months, the diagnosis must be a written diagnosis.

Critical illness cover
The insurer will payout the sum assured if the life assured is diagnosed with one or more critical illnesses as defined by the policy. These are required to include seriuos forms of cancer, stroke and heart attack but do include much more. The ABI (Association of British Insurers) have listed twenty three critical illness definitions most of the UK insurance companies adhere to, some of which provide enhanced definitions known as ABI+.

Waiver of premium
This feature allows the premiums to be waived if the policy owner(s) fall sick and are unable to work, its equivalent to a payment protection policy being bolted on to the life insurance, but this is only for the insurance premiums.

Trusts
When taking out a life insurance policy it is advisable to write the policy under trust. This ensures that the policy will payout to the correct people, at the correct time in the correct amounts. Trusts can be complicated so it is advisable to seek independent life insurance advice.