Buying life insurance
When you're buying life insurance there are some things that it might be helpful to consider.
How life insurance works
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There are four main types of life insurance:
This pays out a lump sum if you die within a set time period. This lump sum amount was agreed when you were setting up the policy, and it does not change.
Decreasing term insurance is often taken out with repayment mortgages. The amount you are covered for decreases in line with the amount of mortgage you owe.
Endowment insurance pays out a lump sum if you die within a specified time period and also pays out at the end of the term. So this type of life insurance builds up an investment value. You will have taken out this type of insurance in the past if you’ve had an endowment mortgage (where you only pay the interest to the mortgage lender and the rest is invested in a life insurance policy). Some endowment policies will pay out on diagnosis of a critical illness.
Whole life insurance
Whole life insurance builds up in value and pays out on death. It can be used as an investment, for protection, or both.
If you’re paying regular premiums for the policy (each month, for example), the insurance continues for as long as you keep up the premiums. If you stop paying, the cover stops unless you have a waiver of premium benefit.
The premiums are set at the time you start the policy and take into account your state of health at that time. If there is a change in health after the policy has started, it doesn’t affect the premiums for an existing policy. However, it would affect the premiums for any new policy.
Many employers offer life cover to employees on a group basis. Usually, cover is available to every employee up to a set limit, regardless of their state of health. Contact your personnel or human resources (HR) department at work to find out whether your employer offers a group life insurance scheme that you can join.
Over-50s plans and funeral insurance
Over-50s plans are designed to pay a lump sum of money into your estate when you die. They’re mainly intended for anyone aged 50–85 who doesn’t already have a life insurance policy.
People with life insurance can still buy over-50s plans and may choose to if they are saving for a particular purpose (such as paying for a funeral) and want to keep this separate from their life insurance.
Over-50s plans don’t require medical underwriting. This means your health won’t be taken into account when you are applying for the policy. The payout also isn’t affected if you are in poor health when you take out the policy. For these reasons, over-50s plans can be suitable for people with existing health problems.
If you die within two years of starting an over-50s plan, there may not necessarily be a full pay-out. But there may still be a refund of the money that had been paid into the plan.
Funeral insurance is similar to over-50s plans, but it pays out a lump sum. This sum should be enough to pay for the average funeral.
With both types of policy, the monthly premiums are usually an affordable amount, but the final payout is generally modest and may be poor value if premiums have been paid for many years.
Funeral insurance should not be confused with funeral prepayment plans, which allow you to pay for a funeral in advance.
Putting a policy 'in trust'
When you die, there may be inheritance tax to pay on your estate. Your estate is everything you own at the time of death, minus anything you owe. Normally, everything you own would include any payout from a life insurance policy, but you can arrange to have most life policies written in trust. This means that instead of the payout forming part of your estate, it goes directly to whoever you nominate – for example, your partner or children.
As well as possibly reducing tax, writing a policy in trust ensures your survivors get the payout quickly instead of having to wait until your estate is sorted out, which could take months or even years. Ask the insurer about putting a life policy in trust.
Usually, there is no extra charge for doing this. How cancer can affect buying life insurance If you’ve had cancer or you’re living with cancer, you will usually be offered an above-average premium or be refused cover altogether. Cover with an exclusion for cancer-related claims would be very unusual.
Whether or not you can get life cover, and on what terms, will depend on the type of cancer you have and the stage it is at. The insurer will want a medical report and may ask you to have a medical examination.
Some brokers specialise in arranging life cover if you have existing health problems. However, it’s difficult to predict whether a company will provide cover, because the decision will depend on your personal situation.
Getting money early from life insurance
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Cashing in an investment policy
Some types of life insurance are investments and can be cashed in early. But the cash-in value may be low, especially in the early years of a policy (see our information about managing savings and investments).
Selling a life insurance policy
An alternative to cashing in an endowment policy is to sell it through a specialist firm to someone else in return for cash immediately. The buyer takes over paying the premiums and receives the eventual payout from the policy. For tips about these options, contact a financial advisor on 0808 808 00 00.
Cashing in a protection policy
Some life insurance policies include an extra benefit called ‘terminal illness benefit’. This means the insurer will pay out the full amount of the insurance cover immediately if you’re expected to live for less than 12 months. You keep the payout even if you live for longer. The money can be used for any purpose. You can check the life insurance policy to see whether terminal illness benefit is included.
Bear in mind that if you draw cash from a life insurance policy during your lifetime, it won’t pay out to your beneficiaries if you die. You may want to take into account how they would manage financially before making a decision.