How to choose the right life insurancePosted on: 12 April 2010 by Mark O'haire
Which is the best type of life insurance to cover my family in the event of my death?
There are two basic types of life insurance: Term assurance and whole of life. Term assurance allows you to protect yourself for a set period of time. After that, the plan stops and you no longer have any cover.
This plan is normally the cheapest as there is a clearly defined period of cover as opposed to an open ended period of cover.
There are a number of bolt-ons you could consider. For example you could have a renewable or convertible option on your term assurance life cover which allows you to renew the plan for another term without the need for medical evidence or the ability to convert it to another more permanent plan.
The risk of starting a plan without such bolt-ons is that your health might deteriorate and when the initial plan ceases you may be uninsurable.
Another bolt on is the benefit of critical illness cover. Its quite expensive but is pretty useful. This option allows for an amount to be paid out on diagnosis of a range of conditions rather than just on death. The conditions include a heart attack, cancer, coma, stroke, for example.
It is important to fully check your plan to be sure you are definitely insured as some companies are better than others. For example if you had a heart attack you might believe you would be able to claim against the critical illness plan. However some companies have restrictive guidelines as to what determines a ‘heart attack’.
Whilst one organisation may pay out on diagnosis by your doctor that you have had a heart attack, others can be quite different. For example one company needs evidence of chest pains to pay out, and another needs evidence that there is irreversible damage to the heart.
When you least need the stress, you do not want to be having the above conversation so be sure you check now if you are fully covered.
Whole of life is the other form of life cover.
This is a more permanent type of plan where you will have the cover as long as you are paying the premiums. This plan can run forever.
Premiums are more expensive than term assurance as effectively the company is guaranteeing to be paying out the sum assured (death benefit) as long as you pay the premiums.
This plan has an investment content included where a proportion of the premium is invested to produce a return if you wished to encash it at a later date.
It is often therefore sold as having free life insurance where you are receiving the life cover and the savings element gives you your money back. This is misleading. If you bought a straight forward term assurance policy and saved the difference between that and a whole of life plan by placing that in an ISA you would be better off as an ISA is tax free and a whole of life plan pays tax as it grows.
Be careful of another cute trick used with both the above schemes to keep your premiums down initially but you may find your self paying through the nose later.
You can ask for a guaranteed or reviewable plan. With the reviewable plan this allows the company to change your premium at any point in the future and if their claims history rises the costs could soar. A guaranteed plan ensures the premiums stay the same.
If you have taken out a life insurance plan ask your independent financial adviser to check every couple of years if your plan is still the most cost effective, as premiums are very competitive, rates change daily and you can save quite a bit of money.
By Peter McGahan
Need Expert Advice?
Peter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.
Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.
If you have a financial query you would like Worldwide Financial Planning to respond to, call 0845 230 9876 or email email@example.com.
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