Life Insurance

Plenty of us will pay for insurance for our mobile phones and our pets, but over a third of adults with dependents don’t pay to cover their biggest asset: themselves.

Thinking about what would happen financially if you were to die isn’t pleasant but it’s something you should do.

Would you want to leave your family with a mortgage they couldn’t afford? In a property they couldn’t pay the bills for? That’s where life insurance comes in.

How does life insurance work?

Life insurance pays out when you die, as long as you pass away during the policy term. The number of years you are covered for is determined at application stage.

You can choose the amount you are covered for and whether you want a level, decreasing, or increasing amount of cover.

Level cover means the amount you are covered for doesn’t change, and a successful claim will result in that amount being paid out as long as the policy is still active. You might be 35 and choose to be covered for £100,000 until age 70. Whether you die at age 40 or age 60, £100,000 will be paid.

Decreasing cover is generally used in line with a repayment mortgage as the amount you need to pay the mortgage off decreases with each payment you make. As the amount paid on a claim reduces over time, and eventually dwindles to nothing right at the end, it is typically a cheaper option than level cover.

Increasing cover looks to combat inflation by adding a bit to the amount you are covered for each year. Your premium will go up as well to reflect that. It’s often used to protect your family and to cover a Help to Buy equity loan.

Often the money is paid as a lump sum but there is a special form of cover known as family income benefit that will look to pay it on a monthly basis instead.

How much will it cost?

That depends on a number of factors, such as:

• Age
• Smoker status and health
• Occupation
• Height and weight
• Medical history
• How much you want to be covered for
• How long you need to be covered for

Is the money from life insurance taxed?

If you pay the premiums from your own net income then any money received from a successful claim is not currently subject to income tax.

It will, however, form part of the estate for inheritance tax purposes. It’s best to put these policies into trust where possible to hopefully ensure a quicker pay-out on death, bypassing the need for probate to be granted, and aiming to mitigate inheritance tax liability.

Please note that tax laws can change at any time.