Do I need life insurance?
Life insurance is a bit like planning for your retirement- while you are young and vibrant you can’t imagine being old and crumbly, so planning for old age or death seems at best over-prudent and at worst, a bit gruesome.
Still, as the Scouts would say, to Be Prepared is everything, and for most people, wanting to make sure their family is provided for is the most pressing factor that forces most people into action. But before you rush out and buy the nearest policy, check what cover you might already have, what state help there is, and the most tax-efficient way to buy the right kind of policy.
Life cover you already hold
You see, you might already be covered. Many employers offer a death-in-service benefit to their employees, which means that if you die while employed by the company (you don’t actually have to be at work when you pop your clogs) they will pay out a lump sum of (typically) between 1 and 4 times your annual salary to your chosen beneficiary. Depending on how much you earn, this may be sufficient cover for what you need.
Often, people’s main concern is their mortgage- most of us would rather not leave our loved ones facing a large monthly bill while distraught at the loss of our wonderful selves, or face eviction from the family home. Mortgage companies know this and many offer optional life cover as part of a mortgage payment, and some companies insist upon it. Check your documents and you may find your biggest financial worry is already covered.
Finally, if you do pay into a personal pension, you may have an element of life cover included within that, on top of any spouse entitlement on your death. Again, check your policy documentation, or check with your broker to see what your family will get after you’ve gone.
Pick the Treasury’s pockets
Of course, even if you are already covered, a little bit of extra help for the family wouldn't go amiss. Years ago, surviving spouses used to get Widow’s Bereavement Allowance, which was basically an extension of Married Couple’s Allowance for two years after death. Of course now there is no allowance for married couples, this no longer exists, but there are three State benefits that could help you out.
Providing you and your (deceased) spouse were under State Pension age (an ever moving target), and your spouse has paid sufficient National Insurance contributions, you could get Bereavement Payment, a one-off tax free lump sum of up to £2,000. If your spouse was over State Pension age but not entitled to a State Pension, you could qualify too.
In addition, there are two weekly benefits, Bereavement Allowance and Widowed Parent’s Allowance.
Bereavement Allowance is paid to widows or widowers aged over 45, is payable for up to 52 weeks, and again depends on your spouse having paid sufficient National Insurance contributions in his or her lifetime. The rate ranges from £30.21 per week at age 45 up to the maximum of £100.70 for those aged 55+
Widowed Parent’s Allowance is, unsurprisingly, paid to those bringing up children, and if you are, or your spouse was, claiming child benefit, then you can get up to £100.70 a week for up to 52 weeks. You can also claim if you are pregnant at the time of your spouse’s death. If your child benefit stops during the 52 week period, you can go on to claim Bereavement Allowance, if eligible. Again, the amount and entitlement depends on your spouse’s National Insurance contribution record. See, you knew it was paid for something.
Both Bereavement Allowance and Widowed Parent’s Allowance are taxable benefits, although if this is your only income, even at the maximum 2011/12 rates shown above your income would not exceed the personal allowance. You cannot claim the benefits if you are divorced, your civil partnership is dissolved, you remarry (presumably after a divorce?!) or you are living with someone as man and wife. Or man and man or woman and woman. Neither can you claim if you are in prison. Sorry.
Life insurance policies
But if you still decide you want some extra cover, there are three important basics to know about life insurance policies, and a nifty (and perfectly legitimate) tax avoiding trick.
Level term assurance offers cover for a fixed amount over a fixed period of time. If you die during the period, the policy pays out the fixed amount. If you survive the period, the insurance company laughs all the way to the bank with all the money you paid in premiums over the years.
Decreasing term assurance is most often used to cover outstanding mortgages. The amount insured decreases over time, broadly in line with a repayment mortgage, so that death at any point should pay out just enough to pay off the outstanding balance. This type of policy is cheaper than level term, as the insurance company’s exposure decreases over time, but again, if you die one day after the policy ends, you get nothing.
Whole of life insurance does exactly what it says on the tin* and covers you for the whole of your life, so that whenever you die, the insurance company pays out. Because they will definitely have to pay, this type is far and away the most expensive, and is more like an investment product, with your premiums purchasing units that are cashed in on your death.
Finally, a nifty trick to avoid inheritance tax is to write the policy in trust- in simple terms this means that your life is insured by your wife (or vice versa) even though you pay the premiums. This means that when you die, she gets the money, rather than you. Clearly you will be dead, and if you get a shedload of money, it will go into your Estate and potentially become liable for inheritance tax to the extent the value (of your whole Estate, including your house) exceeds £325,000, or £650,000 on the second spouse’s death. It is a very simple process and merely involves completion of an extra form. All you have to do is ask for it.
*this type of policy is not actually sold in an actual tin. Normally.