UK life insurance customers who are tied into 25-year policies could be overpaying as much as £1.2bn every year, according to life insurance company DeadHappy. So how do you know your policy is fit for purpose and how do you make sure you take out the right policy for you? Knight Frank Finance head of insurance, James Jones, explains.
Why do I need a life insurance policy?
If you have financial obligations and people who are dependent on you, you need to consider how your family would cope financially if you were no longer around. Savings and investments can be used to cover some of the financial impact, but often savings are only sufficient for short periods and, in an ideal world, they shouldn’t be exhausted to cover living costs and financial commitments. Life insurance can be used to cover a mortgage, personal loans, credit card bills, school fees and living expenses.
In single income households, life insurance is a greater priority as the loss of income when a loved one dies can mean having to sell the family home and a change of school for children. This could mean a complete lifestyle adjustment for the whole family.
A life insurance policy can also be used effectively to mitigate inheritance tax liabilities and is commonly used as part of financial planning when a gift is made or simply to protect beneficiaries from a large inheritance tax bill when inheriting a family home.
I’m looking to get life insurance, but I don’t know where to start – what type of policy should I take out?
The most common mistake people make is taking out a policy without getting advice. There are several types of life insurance available, and each is designed specifically to protect against different liabilities. Depending on what you want the policy to do, it can be catered to your individual circumstances and even cover for a mortgage can be tailored specifically to your mortgage terms. An adviser can help make sure your policy matches your needs, so you are not paying more than you need to for your cover.
Premiums are not more expensive with an adviser and Knight Frank Finance does not charge any fees for the advice they provide.
What type of cover should I choose?
This is really dependant on your situation; a conversation with an adviser will start with finding out what your income, debt, assets and liabilities look like. This will determine what types of policy could suit you, including what amounts of cover are needed and over how many years.
I’ve had a change in circumstances, what should I do with my policy?
Reviewing an existing life insurance policy every two years to ensure that it continues to match your needs is good practice in financial planning. Policies can sometimes be cheaper to replace when rates change or when your liabilities have been reduced or increased. Ask an adviser to provide a comparison of the market, this will help confirm if replacing cover or topping up cover will be cheaper.
Will the pay out be subject to inheritance tax and is there a way around this?
On its own, a life insurance policy pay out will be subject to the same inheritance tax rules as cash. However, under current legislation, writing a life insurance policy into a trust allows you to separate any potential pay out from assets you hold in your estate, and therefore protects the life insurance pay out from any inheritance tax liability.
There are a number of life insurance-specific trusts that can be used, dependant on the circumstances. Knight Frank Finance’s advisers can help provide guidance on the right type of trust and set up a life insurance policy in trust, to protect a pay out against inheritance tax.
If you’d like to discuss your personal insurance cover, speak to one of our insurance consultants. Contact us to arrange an appointment.