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Life Insurance
Life Insurance is what it says it is. It pays a pre-agreed sum assured to your estate when you die. Term assurance, which is what I’m covering here, is the cheapest way of providing your loved ones with some money when you’re no longer with them. There are two distinctive types of term assurance; level and decreasing.
Firstly decreasing, because that’s the easiest to explain - usually this is taken out to protect the outstanding balance on a Repayment mortgage. Basically, you start with a sum assured and term that match your outstanding mortgage balance and term. Assuming that you never change your mortgage or your life insurance, as your mortgage decreases over the term, so does the sum assured on the life insurance so that, at the end of your mortgage term, you will owe nothing on your mortgage and the sum assured on your life insurance should have reduced to nil.
Of course, most people change their mortgage every couple of years, so I’d recommend reviewing your life insurance at the same time to make sure that your protection is still suitable. Beware of changing your insurance as often as you change your mortgage, though, because the older you are, the more expensive it is and the policy will require the disclosure of your medical history, which can also impact on the cost. However, non-disclosure may result in a claim not being paid out!
Ok, level insurance – this is usually taken out for a couple of reasons; as mortgage protection for an Interest Only mortgage or simply as family protection. You’d use level term assurance to protect an Interest Only mortgage because on this type of mortgage you’re only repaying the interest charged on the mortgage not any of the capital balance. This means that at the end of the mortgage term, you’d still owe the amount you borrowed in the first place. With level term assurance, the sum assured stays the same for the entire term.
Using this type of insurance for family protection, there’s no hard and fast rule about how much you need, generally ten times your income is suitable, but this amount depends on the amount of cover you’ve got already and the cost involved.
Always remember with term assurance – there’s no investment element. You’re paying purely for the cover over the term. You get nothing back at the end of the plan or if you cancel it. Plus, the cover stops as soon as you stop paying for it.
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