User:Mokhlissea/sandbox

Nobody likes to contemplate their own death, which is why many of us neglect to arrange life insurance-- and surveys show that one person in three has no life insurance at all.

Without a life insurance policy, your loved ones could struggle to pay the bills and maintain their standard of living. It can save you money, too, because it will help you to decide the right policy for you and your family, at the right price.

When you die, Life insurance pays out. It's easy to understand, isn't it? Life cover is not that simple and there are big differences between the types of cover and the size of the premiums.

What is term assurance?

Term assurance is the most straightforward type of life insurance - and usually the cheapest. Basically, if you die within the policy term, it will pay out a lump sum agreed at the outset. The term can vary in length from a few years to a few decades, though you might not be able to buy term assurance beyond a certain age.

It is important to remember that term assurance only pays out if you die within the term. So, if you take out a 15 year policy and die after 16 years, your family will get nothing.

Some policies will pay out a smaller lump sum if you are diagnosed with a terminal illness during the policy term. But always check the terms and conditions for details.

How do I decide the length of a life insurance policy?

Most people want their policy to be in force for as long as they have dependents. If you have children who are six and four, you might want the policy to run until the youngest child has left University, so about 18 years.

How much cover do I need?

Most policies set minimum and maximum payout limits, but there is usually plenty of flexibility within those boundaries. Bear in mind that the bigger the payout, the higher the premium.

Don't forget to take into account any death in service benefit from your employer. Many companies will pay a lump sum equivalent to four times your annual salary if you die while still employed.

You should regularly review your policy because your circumstances may change. You might for example, have more children, take on a bigger mortgage, or even get divorced, all of which would affect the potential payout and therefore the premiums.

How much does life insurance cost?

When they set premiums, insurers look at the length of the term and the size of the payout. They also consider a number of other factors, including your gender, age, state of health and occupation.

Men don't generally live as long as women, so they typically pay 30 % more for their life insurance. The European Court of Justice recently ruled that insurers can not set premiums according to gender.

Anyone in a poor state of health can expect to be hit with a higher premium, as can older customers and people in risky occupations. A 25-year-old librarian in perfect health will find cheaper cover than a 45-year-old miner who smokes like a chimney.

Smoking can have a big impact on the cost of life insurance policies. It can usually pay to give up, though you won't be recognized as a non smoker until you have managed a year without cigarettes. If you have kicked the habit, you should tell your insurer, or switch to a different policy because you could save money on your premiums.

Don't be tempted to lie about your health or any medical conditions. You could find that the policy will not pay out if you don't disclose all the relevant details when you apply for life insurance.

Always check whether the life insurance premiums are reviewable or guaranteed. Reviewable premiums are only guaranteed for the first five or ten years, when the insurer will reassess the cost. As life insurance becomes more expensive as you get older, you might find that reviewable premiums become very expensive later in life.

How do I choose the right type of life insurance cover?

There are various forms of term assurance. With a level term life insurance policy, the payout remains the same throughout the term. So, if you take out cover for £ 200,000 on day one, the policy will pay out 200,000 if you die at anytime within the term.

The payout on decreasing term assurance gets gradually smaller until it finally reaches zero at the end of the policy term. You would normally buy decreasing term assurance to cover a dwindling debt, such as a capital repayment mortgage. Or you can buy mortgage term assurance, which works in the same way and is set up to coincide with your mortgage term.

If you buy level term assurance, inflation erodes the buying power of the policy. Increasing term assurance is usually more expensive than a level policy.

Renewable term assurance is often taken out for a short term, with the option to renew at the end of the term without the need to undergo a health check. If you buy a renewable policy, you can be sure that you won't be refused cover on health grounds. However, the premiums could still rise because you will be older when you take out the new policy.

Or you can opt for convertible term assurance, which allows you to convert your term policy into a whole life insurance policy, so that the insurer pays out when you die, whenever death occurs. Again, the insurer will not conduct a health questionnaire at conversion, but premiums could still increase. Convertible policies are also more expensive than standard level term assurance.

If you would prefer your policy to pay out a regular income on your death, rather than a lump sum, you can choose family income benefit. Let's say you took out a 20-year policy and died after 16 years. The policy would not pay out a lump sun on your death but would instead pay a monthly income to your family for the remaining four years of the term.

Do my wife and I need separate life insurance policies?

You can take out individual term assurance policies, or you can take out a policy in joint names, which will pay out on the first death. It's always worth checking the quotes for single life term assurance because it does not always work out more expensive to take out two single policies instead of one joint contract.

Are there other types of life insurance cover?

Most insurers offer whole life insurance cover so that a payout is guaranteed whenever death occurs. In other words there is no set term. The premiums for whole life insurance policies are almost always higher than for term assurance because unless you are immortal the policy will have to pay out.

Whole of life insurance policies work differently to term assurance-- and are rather more complicated. Your premiums are normally invested in a fund, and the performance of the investments in the fund affects the future value of the payout.

The insurer will regularly review the policy to assess whether it is on track to pay out for future claims, taking into account factors such as age and mortality rates. It may then ask the policyholder to increase the premiums, or to accept a lower payout on death and keep the premiums the same.

There are three main types of whole life insurance policy: maximum cover, balanced cover and guaranteed.

If you choose maximum cover, most of the premium pays for the life insurance protection and very little is invested, so the initial premiums are low. However, the policy will be reviewed at regular intervals, so the cost will almost certainly rise or the level of cover fall as you get older.

Balanced cover, sometimes called standard cover, sets the premium at such a level that there should be no need for future increases. More of the premium is invested in the fund, which is then used to subsidise the cost of cover as you get older. As long as the fund performs according to the company forecasts, there should be no need to increase the premiums.

You can cash in the policy if you no longer need the cover. However, the so-called surrender value could be very small in the early years - and could even be less than sum of your contributions.

A guaranteed whole life insurance policy charges a fixed premium for life. There is no investment element and no cash-in value at any time. The advantage of guaranteed cover is that your premiums will not rise and you are not dependent on any investment performance. The disadvantage is the cost, as it is almost always more expensive than the other two options.

Some insurers offer endowment whole of life insurance policies, which combine life insurance with saving for the future in an endowment policy. There are two versions: with profits and unit-linked, but both can work out expensive and the size of future payouts is not guaranteed.

Do I have to pay tax on a life insurance policy payout?

If a life insurance policy pays out, the money goes to your estate and is therefore potentially liable for inheritance tax (IHT), which is paid at 40 % on estates worth more than £ 325,000. If you write the life policy 'in trust', it will fall outside your estate and your family will not have to worry about an IHT tax bill on the payout. They will also get the money more quickly as it does not have to pass through the legal process of probate.

It should not cost anything to write the policy in trust and your insurer will have the necessary paperwork.  Can I buy any add-ons?

You can usually add critical illness cover to a life policy. Critical illness insurance pays out a lump sum on the diagnosis of one of a set list of conditions, such as cancer or a heart attack. Some insurers bolt on critical illness cover at no extra charge, but you should always read the small print carefully as the policies often come with a raft of exclusions.

Some insurers also offer waiver of premium, so that your premiums will continue to be paid if you can no longer work because of illness or injury. There is usually a fee for waiver of premium and, again, it is important to read the small print. It might, for example, be a number of weeks until the benefit kicks in. There will also be strict definition of incapacity.

What is pension term assurance?

Policies that were in force before July 31 2007 can still take advantage of the tax benefits. Anyone with pension term assurance should therefore think carefully about switching their policy because they would lose the tax perks.

With a level term life insurance policy, the payout remains the same throughout the term. The payout on decreasing term assurance gets gradually smaller until it finally reaches zero at the end of the policy term. Or you can opt for convertible term assurance, which allows you to convert your term policy into a whole life insurance policy, so that the insurer pays out when you die, whenever death occurs. You can take out individual term assurance policies, or you can take out a policy in joint names, which will pay out on the first death. The premiums for whole life insurance policies are almost always higher than for term assurance because unless you are immortal the policy will have to pay out.