Choosing life policies

Transcription

1 Choosing life policies

2 CHOOSING LIFE POLICIES Most people believe that life insurance is a good thing. For most of us, it underpins our financial planning, protecting our family, while for others it can be a key business tool or estate planning mechanism. Life insurance can also be a complicated business full of jargon, legalese and long application forms. Yet it need not be like that. Understand the fundamentals, and life insurance becomes relatively straightforward the problem is that no-one bothers to explain those fundamentals to us in the first place. The prime purpose of any life insurance policy is to provide money where there is a financial need resulting from a death. There may be other reasons to buy life insurance, but they are subsidiary to this main need. Why might money be needed? To pay off a mortgage (or other loan) if a borrower dies. Mortgages and loans still have to be repaid, even if the borrower has died. To protect a family against the early death of a spouse, partner or parent. Life insurance can provide a lump sum or income to help compensate for the permanent loss of someone s salary. Where there are young children, any need is likely to be even greater but will decline as they get older. To pay for a funeral. To pay the inheritance tax bill on an estate. To protect a business against the financial consequences of the loss of a business owner or person key to that business. On whose life should the policy be taken out? You can have life insurance on the life of one person or on the joint lives of two (more is possible, but this is unusual except for group life insurance which is usually bought by employers). If it is your income that will be lost if you die, you are the life to be insured. If you live with a spouse or partner, you can insure both lives. In that case, the policy will pay out if one of you dies. If you are insuring to pay inheritance tax, a second death policy is needed. This only pays out once both of you have died which makes the insurance much cheaper. How much money is needed and when? This might be a lump sum or a regular income. If a regular income, how long should the income be paid for (e.g. until children have finished their school and university/college education)? If you have a mortgage, you might want a lump sum to pay off the loan if you die. So the minimum cover will be the outstanding mortgage, perhaps with the sum insured falling year by year as you pay back the mortgage (if you have a repayment type mortgage). But most people will want more cover than that. A young person, especially one with or planning a family, may want say ten times salary cover or more. This sounds like a lot, but once any loans have been paid off and the remainder invested it would still generate less income than your salary. All Rights Reserved Page 1 of 3

3 If you have young children, a regular income perhaps until the children leave full-time education may be more appropriate. What is the right type of policy to have? There are many insurance policies available, and because every individual s needs are different there is no real answer to this question. Only expert advice and careful consideration can ensure you have an appropriate, adequate policy. You need to bear in mind that your circumstances and therefore your insurance requirements will change as you get older. Ensuring the right person or people get the money It makes sense to have a will (if you have no will, in effect you get a will determined by the state under the laws of intestacy) and we can help you choose a solicitor or will writing service. Sometimes it also makes sense to take out a policy on someone else s life, e.g. taking out a policy on your spouse s or partner s life. Life insurance can be written in trust, too. This can help to ensure that the right money goes to the right people at the right time. It avoids any probate delays (so the money can be paid out quickly), avoids uncertainties about who you wanted to benefit from the policy and may have inheritance tax advantages, too. We can help you to choose the right type of trust, and the good news is that most insurers provide all the documentation and information free of charge. Protecting against other events Financial protection against dying is important, but there may be other events you wish to protect against too, for example: The cost of private medical care. Everyday health costs such as dentistry, optical care and hospitalisation. The financial costs associated with being diagnosed with a very serious, or critical, illness or condition. Being unable to work long term because of illness or disability. Being unable to work for a few weeks or months because of illness, disability or unemployment. The cost of long term care for you or a relative. You can insure against all of these events. How we can help Once you have identified what sort of cover you need, and how much, the process of choosing the right insurance policy can start in earnest. This is where we can help, too. Our role is to do three things: 1. To know enough about you to be able to make the right recommendations. We do that by asking you a series of questions called a factfind that take account of facts about you, but also about your preferences and views too. We don t expect you to be an expert on life insurance, but before we can make any recommendation we need to know whether you are the sort of person who is All Rights Reserved Page 2 of 3

4 prepared to take some risks for example, that your premiums might rise in future or whether you want a solution that is guaranteed no matter what. 2. To help you to identify your priorities. If you were insured against absolutely everything, most people would end up paying more than they could comfortably afford on premiums each month. So prioritising needs is important, perhaps too working out how things might change in future, e.g. if you have a family, change jobs or retire. 3. Recommend the best solutions to meet your needs. Choosing the right insurance policy and insurer is important, but there may be other things too such as having a will or writing policies in trust. Most insurance solutions will involve you paying a monthly (or sometimes annual) premium, and you usually have to continue paying each month or the cover will stop almost immediately. Once that happens, it can be impossible to continue and you would have to start again with a new policy, so always think very carefully before stopping any policy. As you can see, there is quite a lot of work involved in choosing the right life insurance policy it is not as simple as just looking up who is cheapest in a magazine or on the internet. However, once you have the right protection in place, keeping arrangements up to date is a much more straightforward process. In effect, a few hours of investment now can really pay financial dividends in the future. This guide is for general information only and is not intended to be advice to any speci recommended to seek competent professional advice before taking or refraining from taking action on the w and at April 2014, which are All Rights Reserved Page 3 of 3

5 Thank you for your interest in this Essential Guide. For further information or if you would like to discuss any aspect of the guide, please contact us. EA Financial Solutions Ltd 869 High Road Finchley London N12 8QA +44(0) All Rights Reserved