What is life insurance and why should I have it?

Life insurance can be used in a variety of circumstances, for example, to protect against an Inheritance Tax (“IHT”) liability, or against the financial consequences of a breadwinner dying. Life insurance is a popular and effective form of planning which pays a tax-free lump sum (the ‘sum assured’) to the policy owner(s) in the event of death.

A necessary caveat to this article is that it is over-simplified in order to explain concepts; in reality, when advising on life insurance, there are a myriad of factors at play, which need to be established in order to recommend the most suitable policy.

1. What is life insurance?
   Life insurance is a contract with a life office that obliges it to pay out the sum assured in the event of the death of a person insured (the ‘life assured’).
2. Why take out a policy?
   To protect beneficiaries in the event of an individual’s death. Common scenarios are:
   To meet an IHT liability
   To protect beneficiaries’ living standards
   To settle a debt on death (for example a mortgage)
3. How long should cover last for?
   It depends entirely on circumstances. For example, if a client has been deemed domicile but will lose their status after five years of non-residency, five years would make sense.
4. What is the difference between term assurance and Whole of Life (“WOL”)?
   As long as the premiums are maintained with a WOL policy, the life assured will be covered for the rest of their life, whereas a term policy will expire after a set period (the maximum possible policy length is typically 40 years – subject to circumstances).
5. How do I know if the insurer will pay out?
   According to the Association of British Insurers (“ABI”), UK insurers paid out on 99.9% of claims made on WOL polices in 2015. If the terms of the policy are met, the insurer must pay out.
6. What is ‘pure’ protection?
   Pure protection does not include an investment element and such a policy has no cash-in value.
7. What happens if I stop paying the premiums?
   If premiums are not paid, even if accidentally, then (in most cases) the policy will lapse and cover will be lost.
8. Can I gain cover if I am not resident in the UK?
   In most circumstances – yes.
9. I have received quotes, should I choose the cheapest?
   This is rarely the best option. Providers vary greatly, some have an exceptional administration processes, some don’t. Moreover, the terms of each policy should be analysed carefully in order to ensure they match the requirements of the client.
10. If I apply, what is required?
    It depends on the size of the sum assured, and advances in medical science mean the thresholds change regularly. A relatively young life assured (e.g. under 30 years old) seeking a sum assured of under £500,000 might only be required to complete a application, whereas an older applicant for a higher sum assured might need to attend a comprehensive medical (which the insurer will arrange), complete a financial questionnaire and provide confirmation from a third party outlining the reason for the policy.
11. With regards to WOL, what is the difference between a policy set up on a ‘Guaranteed Death benefit basis’ and a ‘Maximum Death benefit basis’?
    A guaranteed policy, as the name suggests, offers guaranteed premiums for its duration. In other words, the insurer guarantees to never increase the premium.
    A policy set up on a ‘maximum death benefit basis’ guarantees not to increase premiums for a set period, usually the first ten years. After which, the premiums will increase materially (typically 2-3x). Premiums are then reviewed and increased (typically every five years).