Features of life insurance policies

When you are choosing which life assurance policy to take out, it is worth closely investigating exactly what each policy provides. Changes may take place during the life of the policy, both personally and to the wider economy. A policy taken out many years before may not keep up with one’s circumstances.

To counter this, some companies offer index-linked policies. These policies move in line with the Retail Price Index and keep pace with it on a yearly basis. It is important to look for this option, and to know for sure whether the linking will continue on a yearly basis or permanently.
It is essential to know exactly what is covered in your life insurance policy. For instance, if you were to die whilst participating in some adventure sports, the insurer could refuse to pay out. The older you become, the greater the risk you pose to an insurance company, and the more expensive the policy will become.

Who needs to be covered by a life insurance policy?

The person who generates the largest salary should be covered, but this should not be exclusive. For instance, if you have children, whichever partner provides primary childcare also needs to be covered. It can be advisable to arrange separate life assurance policies, but generally it is more economically viable to arrange joint life assurance cover. Before taking out a policy of this nature, the exact conditions of the cover should be discussed.

The beneficiary of a life insurance policy

When you choose a life assurance policy, you will need to name a beneficiary. This is the person who will benefit from the policy in the event of your death. Usually, a life assurance policyholder will name their husband or wife and/or their children as the beneficiaries. However, beneficiaries are not limited to family members. Many life assurance policyholders choose their business partners as beneficiaries. Joint-life policies are cheaper and popular: the policy often pays out when the first of the two policyholders dies.
Life-of-another policies are available: one partner takes out insurance on their other half. For instance, a husband could take out a policy that covers his wife, or the other way around. To take out a policy of this type insurance companies generally require you to have an insurable interest in the person you are insuring.

Taxation issues for life insurance policies

A foremost question in many life assurance policyholders’ minds is whether the payout from their insurance will be taxed. Payouts of this nature are usually free from deductions by themselves: as personal income tax it is legally tax-free.

However, the catch is that the payout will be considered as part of the deceased’s overall estate. The payout could therefore raise the overall level of the estate above the threshold for paying inheritance tax. In this instance any amount over the threshold is liable to be taxed. There are ways around this situation, such as writing the policy in trust. This separates the policy from the estate, and ensures that the trustees can pay out to the beneficiaries in the event of a death.

Writing a life assurance policy in trust is complex, and it will almost always be necessary for people choosing this route to seek help from a financial advisor or solicitor.

How much will a life insurance policy cost?

Every policy offered by life assurance companies varies in price. The expense of the premium can vary considerably depending on a number of different factors. These could include the type of policy, how long the policy extends for, the size of the payout in the event of a death, how flexible the policy is, who is covered by the policy, etc.

Furthermore, individual factors revealed to the insurer when filling out insurance forms will also influence the cost of your premiums. These could include your age, how healthy you are, your medical history, what your occupation is, whether or not you smoke, etc. Insurance companies will also be interested in genetic disease traits running in your family, particularly if they influence your chances of survival.

Applying for life insurance

When applying for a life insurance policy, many people will be able to simply fill out the forms. For some applicants, however, the life assurance company will need more information before providing a policy. This will generally come in the form of something called a mortality table. These are used to determine the level of premium for each individual person.
Mortality tables assess the risk posed to the insurer of the person dying within the terms of their life insurance policy. Insurance companies base these tables on a variety of factors including age, sex, occupation, smoking etc. Once all of these factors have been taken into account, the insurance company may increase the expense of the policy. These are known as ‘loadings’ and may involve the insurance company questioning your GP or in some instances asking for a medical examination.

You should tell the whole truth to the insurer, because failure to disclose information can invalidate your insurance claim. This would result in no payout, and your insurance policy becoming useless.

Underwriting in life insurance

After your application process is complete, your proposal for life assurance will be assessed for risk and from this the rate of premium will be established. Rates are generally anchored per £1,000 of cover guaranteed in the policy. Doctors employed by the insurance company may be utilised to interpret medical reports, in order to determine the level, if any, if loading.

The underwriters will assess the application and offer terms and costs. Usually, this will be exactly the quoted price but loading may occur in some instances. You will be advised of the reasons for any increase in premium cost, either by your insurer or by your GP.

In the event of a life assurance claim

Should the holder of a life assurance policy die, the beneficiary of the policy will generally be asked to provide proofs in the event of a claim. These will include death certificates for the policyholder, a written proof of policy and any further documents required by the insurer in order to process the claim. Should the policy be written in trust, the payout will be made quickly, but a probate will be needed if the policy is not written in trust. This can take some time.

Arrears on a life assurance policy

If a life assurance policy falls into arrears, the insurance company will write to the policyholder informing him or her of the consequences of non-payment and stating the amount of arrears. Some companies will impose late payment charges. Some policies have surrender values, which means that non-forfeiture provisions will come into affect should they fall into arrears. Arrears policies vary between offices, but to ensure cover it is always advisable to meet premium payments.