Life insurance

Life insurance can be used as an investment, for protection, or both. These policies pay out a lump sum of money when you die. The amount may be agreed at the start or it may build up in value.

You will normally pay monthly payments called premiums. These will be set at the time the policy begins. If you have cancer, you may be offered higher premiums or refused insurance altogether. Some brokers specialise in arranging cover for people with health conditions.

Check whether your employer offers a group life insurance scheme. Plans also exist for people over the age of 50 that don’t take health into account.

Cashing-in or selling a policy early may be possible. Remember, the cash-in value may be low and it won’t pay to your beneficiaries. Some policies also include a ‘terminal illness benefit’. This means that the full amount of cover will be paid if you’re expected to live for less than 12 months. To reduce inheritance tax on a payout, ask your insurer about putting a life policy in trust. This means it goes directly to someone you choose.

How life insurance works

There are four main types of life insurance:

  • Level term insurance 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 a set time period. If you do not die within the term, it 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 if you are diagnosed with a critical illness. 
  • Whole life insurance builds up in value and pays out on death. It can be used as an investment, for protection or both.

Death-in-service benefit

Many employers also offer life cover to employees. Cover is usually available to every employee up to a set limit, whatever their state of health. Speak to your HR department at work to find out more. Many employers offer a type of life insurance called ‘death-in-service benefit’. Death in service benefit guarantees a lump-sum payout if you die while working for that employer. You can usually choose who you would want this payment to go to (your beneficiaries). However, sometimes death-in-service payouts go into a discretionary trust, which means you cannot choose exactly who will benefit.

If you consider giving up your work due to ill health, check with your employer what would happen to any life insurance cover they provide.

Over-50s plans

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 – where insurance companies look at your details to decide whether or not to insure you, and what the terms of that insurance should be. 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.

The monthly payments are usually an affordable amount, but the final payout is generally modest. If you live for many years after you take out the plan, you may end up paying in much more money than is paid out when you die.

If you die within two years of starting an over-50s plan, there may not necessarily be a full pay-out. But there may be a refund of the money that had been paid into the plan.

Some people prefer to pay for their own funeral using a pre-paid funeral plan. These may be better value for money, but you need to make sure you ask:

  • Does the plan cover all the costs of the funeral?
  • What happens if the funeral home goes out of business?
  • What happens if you die while overseas?

‘I sadly didn’t have life insurance, which I regret as I was entitled to nothing. My mortgage could have been paid during treatment.’ Laura


Buying life insurance

The two main reasons people may buy life insurance are to:

  • Pay off large debts, such as a mortgage to protect your house for your spouse or family.
  • Provide an income to your spouse or family after you die.

You will normally pay monthly payments called premiums. 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 will affect the premiums for any new policy.

If you’re paying regular premiums for the policy (each month, for example), the insurance continues for as long as you keep paying the premiums.

If you stop paying, the cover stops unless you have a waiver of premium benefit.

Mortgage providers often try to sell life cover when mortgages are taken out. You don’t need to buy life insurance from them, so you can shop around to find the best insurance for you.

It’s always a good idea to contact your mortgage provider to check whether you have any life insurance included in your mortgage repayments.

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.

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 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

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.

Selling a life insurance policy

An alternative to cashing in a life insurance 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 our financial guides 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.

If you cash in or sell your life insurance policy, it won’t pay out to your beneficiaries when you die. You may want to think about how they would manage financially before making a decision.

‘We can help with the claims process. We can also help you if you want to buy insurance but are finding it difficult because you have cancer.’ Craig

Craig, financial guide

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