Life Insurance

Life insurance is a contract between an individual (the policyholder) and an insurer, where the insurer agrees to pay a specified sum (the sum assured) to designated beneficiaries (e.g., family members or a trust) upon the policyholder’s death, provided premiums are paid as agreed. It is primarily designed to mitigate the financial impact of the policyholder’s death on their loved ones, offering peace of mind and stability.

• Purpose:
  • To provide financial support to dependents (e.g., spouse, children, or parents) after the policyholder’s death.
  • To cover specific financial obligations, such as a £200,000 mortgage, funeral costs (averaging £4,000–£5,000 in 2025), or ongoing living       expenses.
  • To replace lost income, ensuring dependents maintain their standard of living.
• How It Works:
  • The policyholder pays regular premiums (monthly or annually) to maintain the policy.
  • Upon the policyholder’s death during the policy term, the insurer pays a tax-free lump sum or regular payments to the beneficiaries.
  • Some policies include a terminal illness benefit, allowing the policyholder to claim the sum assured if diagnosed with a terminal illness (typically       with a life expectancy of less than 12 months).
• Eligibility:
  • Available to UK residents, typically aged 18–75 at the start of the policy (upper age limits vary by insurer).
  • Applicants must disclose health, lifestyle (e.g., smoking, alcohol use), and occupation details, as these affect premiums and coverage.
  • Pre-existing medical conditions may lead to higher premiums or exclusions unless fully disclosed.

• Term Life Insurance:
  • The most common type, providing coverage for a fixed period (e.g., 10, 20, or 30 years).
  • If the policyholder dies during the term, the insurer pays the sum assured. If they survive the term, the policy expires without payout.
  • Sub-types include:
    • Level Term Insurance: The sum assured remains constant (e.g., £100,000 throughout a 20-year term). Ideal for covering fixed debts like an        interest-only mortgage.
    • Decreasing Term Insurance: The sum assured reduces over time (e.g., from £200,000 to £0 over 25 years), often used for repayment mortgages where the debt decreases.
    • Increasing Term Insurance: The sum assured rises with inflation (e.g., linked to the Retail Prices Index or a fixed percentage like 3%), as may premiums, to maintain real value.
  • Cheaper than whole-of-life policies but offers no payout if the policyholder outlives the term.
• Whole of Life Insurance:
  • Provides coverage for the policyholder’s entire life, guaranteeing a payout upon death, regardless of when it occurs.
  • More expensive due to the certainty of a claim.
  • Often used for Inheritance Tax (IHT) planning (e.g., to cover a £130,000 IHT bill on a £500,000 estate above the £325,000 nil-rate band in 2025/26) or to leave a legacy.
  • Premiums may be fixed or reviewable, and some policies include an investment element (e.g., with-profits policies).
• Family Income Benefit:
  • A type of term insurance that pays a regular, tax-free income (e.g., £2,000/month) to beneficiaries instead of a lump sum, from the       policyholder’s death until the policy term ends.
  • Suitable for replacing ongoing income to support dependents, such as children until they reach adulthood.
  • Typically cheaper than level term insurance due to the decreasing liability over time.
• Joint Life Insurance:
  • Covers two people (e.g., spouses or civil partners) under one policy.
  • Joint life first death: Pays out upon the first partner’s death, then the policy ends. Common for couples covering shared debts like a £250,000       mortgage.
  • Joint life second death: Pays out only after both partners die, often used for IHT planning.
  • Cheaper than two single policies but less flexible, as the surviving partner loses coverage after the first death.
• Over-50s Life Insurance:
  • A simplified whole-of-life policy for individuals aged 50–80, requiring no medical underwriting (guaranteed acceptance).
  • Pays a small lump sum (e.g., £2,000–£20,000) upon death, often used for funeral costs.
  • Premiums are fixed, but payouts may be limited if the policyholder dies within the first 1–2 years (e.g., premiums refunded only).

• Sum Assured:
  • The amount paid to beneficiaries upon the policyholder’s death (e.g., £100,000 lump sum or £1,500/month for family income benefit).
  • Determined based on financial needs, such as:
    • Outstanding debts (e.g., a £200,000 mortgage).
    • Income replacement (e.g., 10x annual salary of £30,000 = £300,000).
    • Specific costs (e.g., £5,000 for funeral expenses).
• Policy Term:
  • For term insurance, the duration of coverage (e.g., 10–40 years, often until the mortgage is paid or children are independent).
  • Whole-of-life policies have no fixed term, covering the policyholder until death.
• Premiums:
  • Paid monthly or annually, ranging from £5–£100+/month depending on age, health, lifestyle, occupation, sum assured, and policy type.
  • Guaranteed Premiums: Fixed for the policy term, offering cost certainty.
  • Reviewable Premiums: May increase over time based on insurer adjustments or age, but often cheaper initially.
  • Example: A 35-year-old non-smoker insuring £150,000 over 20 years might pay £10–£20/month for level term insurance.
• Terminal Illness Benefit:
  • Included in many policies, allowing the sum assured to be paid if the policyholder is diagnosed with a terminal illness (life expectancy <12 months).
  • Useful for covering end-of-life costs or settling financial affairs.
• Exclusions:
  • Common exclusions include suicide within the first 1–2 years, death due to undisclosed pre-existing conditions, or high-risk activities (e.g.,       skydiving) unless covered by the policy.
  • Full disclosure during application is critical to avoid claim rejections.
• Writing in Trust:
  • Many policies are placed in a trust, ensuring the payout is:
    • Paid directly to beneficiaries, bypassing the estate and probate.
    • Exempt from Inheritance Tax (IHT), as it is not part of the estate.
    • Processed faster, avoiding delays in probate (which can take 6–12 months).
  • Setting up a trust is usually free and offered by insurers at policy inception.

• Financial Security for Dependents:
  • Ensures loved ones can cover expenses (e.g., £1,500/month rent or a £200,000 mortgage) without financial strain.
  • Replaces lost income, supporting children or a non-working spouse.
• Tax-Free Payouts:
  • Lump sums or regular payments are generally tax-free, maximising support for beneficiaries.
  • Writing the policy in trust avoids IHT (40% on estates above £325,000 in 2025/26).
• Flexibility:
  • Policies can be tailored to specific needs (e.g., level term for mortgages, family income benefit for ongoing expenses).
  • Options like increasing cover or terminal illness benefits enhance suitability.
• Affordability:
  • Term insurance is relatively inexpensive, especially for younger, healthy individuals (e.g., £10–£20/month for £150,000 cover).
  • Over-50s plans are accessible with no medical questions.
• Peace of Mind:
  • Reduces worry about leaving dependents in financial difficulty, especially for single-income households or those with large debts.

• No Payout if Policy Expires:
  • Term insurance pays nothing if the policyholder survives the term, unlike savings or investment products.
  • Whole-of-life policies guarantee a payout but are significantly more expensive.
• Cost:
  • Premiums vary widely based on age, health, and coverage. For example, a 50-year-old smoker insuring £200,000 might pay £50–£100+/month, compared to £15–£30 for a 30-year-old non-smoker.
  • Whole-of-life or over-50s plans can become costly over time, especially if premiums exceed the eventual payout.
• Exclusions and Claim Risks:
  • Non-disclosure of health conditions or lifestyle factors (e.g., smoking) can lead to claim denials.
  • Some policies exclude high-risk activities or early death (e.g., within 1–2 years for over-50s plans).
• Limited Scope:
  • Only pays out upon death or terminal illness, unlike income protection (which covers inability to work) or critical illness cover (which pays for       specific diagnoses like cancer).
  • Does not cover unemployment or short-term financial needs.
• Complexity:
  • Choosing the right policy type, sum assured, and term requires careful planning, often necessitating advice from an independent financial adviser (IFA).

• Premiums:
  • Paid from post-tax income and not tax-deductible for individuals.
  • For employer-provided group life policies, premiums may be treated as a taxable benefit-in-kind.
• Payouts:
  • Lump sums or regular payments are tax-free for beneficiaries.
  • If the policy is not written in trust, the payout forms part of the estate and may be subject to IHT (40% on amounts above the £325,000 nil-rate       band, or £500,000 if the residence nil-rate band applies for homeowners passing their home to direct descendants in 2025/26).
• Trusts and IHT:
  • Writing the policy in trust removes the payout from the estate, avoiding IHT and probate delays.
  • Example: A £150,000 payout written in trust is paid directly to beneficiaries, saving £60,000 in IHT if the estate exceeds the nil-rate band.

Life insurance is particularly valuable for:

• Families with Dependents: Parents with young children or a non-working spouse who rely on their income.
• Homeowners with Mortgages: To ensure debts (e.g., a £250,000 mortgage) are paid off, preventing repossession.
• High Earners: To replace significant income (e.g., £50,000/year) for dependents’ living expenses.
• Single-Income Households: Where the loss of one income would cause financial hardship.
• High-Net-Worth Individuals: Using whole-of-life policies for IHT planning (e.g., covering a £200,000 tax bill).

It may be less necessary for:

• Those without dependents or financial obligations (e.g., single individuals with no mortgage).
• Individuals with substantial savings or investments to cover dependents’ needs.
• Those with employer-provided death-in-service benefits (e.g., 3–4x salary).

• Choosing a Policy:
  • Assess financial needs: Calculate debts (e.g., £200,000 mortgage), income replacement (e.g., 10x £30,000 salary = £300,000), and future costs       (e.g., £20,000 for children’s education).
  • Compare policies via price comparison websites or an IFA to find competitive premiums and terms.
  • Consider writing the policy in trust (free with most insurers) to avoid IHT and probate delays.
• Cost Management:
  • Opt for decreasing term insurance for repayment mortgages to reduce premiums.
  • Choose a term aligned with financial obligations (e.g., until the mortgage is paid or children are independent).
  • Non-smokers and healthy individuals can secure lower premiums by disclosing accurate lifestyle details.
• Health and Lifestyle Disclosure:
  • Full disclosure of medical history, smoking status, and high-risk activities (e.g., extreme sports) is required to avoid claim rejections.
  • Some insurers offer “no medical” policies (e.g., over-50s plans), but these have lower payouts and higher premiums.
• Regular Reviews:
  • Update coverage if circumstances change (e.g., new mortgage, marriage, or children).
  • Check for indexation to protect against inflation eroding the sum assured’s value.
• Alternatives:
  • Critical Illness Cover: Pays a lump sum for specific diagnoses (e.g., cancer, stroke), complementing life insurance.
  • Income Protection: Replaces income during long-term illness or injury, not just death.
  • Death-in-Service Benefits: Employer-provided cover (e.g., 4x salary), though it ends if you change jobs.

• Example 1: A 30-year-old non-smoker insuring £150,000 over a 20-year level term might pay £8–£15/month. For decreasing term (e.g., for a £150,000 repayment mortgage), premiums might be £5–£10/month.
• Example 2: A 45-year-old smoker insuring £200,000 over a 15-year level term might pay £30–£60/month, or £50–£100+/month for a whole-of-life policy.
• Example 3: A family income benefit policy for a 35-year-old, paying £1,500/month for 20 years, might cost £15–£30/month.
• Costs depend on age, health, lifestyle, sum assured, and policy type.

If you have a need for Life Insurance, please contact us on 0800 061 46 49 or email ask@phillipscapital.info to discuss your options.