MPO Life Insurance Guide
Life insurance is certainly not the best subject and death is a difficult topic for anyone to talk about. Unfortunately, we will all die at some point but nobody knows when or how it will happen.
In our MPO Guide to Life Insurance, we look at the key elements to a life insurance policy and how to get the right cover to protect your family and home. Even though it’s not a great subject, life insurance can make a massive difference to your loved ones if they ever need it and gives you some peace of mind.
Life insurance can have a massive impact on your family and their financial future, should they ever need to make a claim. There are lots of things to think about when buying or reviewing life insurance, so this guide will explain the main points about how life insurance works.
What is life insurance?
According to the Oxford English Dictionary, life insurance is ‘an insurance that pays out a sum of money either on the death of the insured person or after a set period’.
Essentially, you pay a monthly premium for your policy which is to protect your family and your home if you were to die. The policy pays out a cash lump sum to your beneficiaries (e.g. partner, children, or family) when you die, usually during a term (period of years).
There is no cash in value or investment value to most life insurance policies, so if you stop paying your premiums then any money paid would effectively be lost.
Most life insurance policies will automatically include ‘terminal illness benefit’ which pays out if you are diagnosed with a terminal illness, with less than 12 months to live. Terminal illness benefit is usually to enable the policyholder to organise their finances before they pass away.
There are two main ways to take out life insurance:
- Single Life policy: which is to cover one person or an individual and pays out once to their family
- Joint Life policy: which is a single policy that effectively cover two people (usually a couple) and will pay out once to the surviving partner, upon the death of the first person. Once the policy has paid out once, usually the cover would end at this point.
Types of life insurance
Term Life Insurance
This is by far the most common type of life insurance which as it says, is a policy that has a term applied to it. The terms or periods that most people use for this type of cover are:
- Mortgage term
- Dependency term (age until children are no longer dependent)
- Retirement age
There are also three main types of term life insurance to give you the option to get the right cover for each of the main scenarios that you might need cover for. The three main types of term cover are:
- Level term life insurance (family protection) – this type of policy pays out a level lump sum in the event of death which will always remain the same throughout the life of the policy.
- Decreasing term life insurance (mortgage protection) – this is decreasing cover that is specifically designed to protect a repayment mortgage (capital and interest mortgage). The amount of cover reduces over the term of the policy as the mortgage balance reduces.
- Increasing term life insurance (index linked) – this type of cover is specifically designed to increase at the same or a similar rate to inflation. It will usually track the Retail Price Index (RPI) plus a set percentage for example.
Whole of Life Insurance
A whole of life insurance policy is different to term cover, mainly because it will continue for your lifespan (however long that may be) and is guaranteed to pay out. For this reason, premium payments for whole of life insurance are usually significantly higher than term life insurance cover and therefore, not suitable for everyone.
The other thing to remember about whole of life insurance is that it’s designed for a specific purpose. The most common use for this type of cover is Inheritance Tax (IHT) planning, which isn’t an issue for many of us.
Whole of life insurance can be used to repay the Inheritance Tax that someone might be charged if they die and their estate is above the IHT threshold.
How much is life insurance?
There are several key elements that will be used to determine how much life insurance costs will be for you, and your partner (for joint life insurance).
The main components are:
- Sum assured (how much cover do you need)
- Term of cover (how many years do you need the cover for)
- Type of cover (which type of life insurance do you want)
From a personal perspective, there are a number of elements that will be used to also determine how much your premiums are, such as:
- Date of Birth (how old you are)
- BMI (your height and weight)
- Smoker status (smoking in the past 12 months)
- Medical history
- Lifestyle (e.g. alcohol consumption, drug use etc.)
- Sports and hobbies
- Occupation or profession
All of these elements will be combined to give you your premium for life cover and your application will be medically underwritten or accepted online.
If you want to save money on your policy, you can find out more in our guide ‘How can I reduce my life insurance premiums?’.
Does life insurance pay out?
We’re all understandably nervous about anything the has the word ‘insurance’ in the title, especially after things like PPI several years ago.
Most of us automatically think that insurers will do anything to avoid paying out on a claim. This isn’t the case with life insurance and it is proud to boast one of the highest pay out rates in the insurance space.
Life insurance is also governed by the Association of British Insurers (ABI) which produces annual figures based on previous years performances. These figures include things like life insurance payout rates and the amount of pay outs that have been provided to customers.
Life insurance claims statistics
In the table below, you can also see which of the major insurers have paid out claims between 2019 and 2021.
|Legal & General
How to claim on my life insurance
There are several different ways to claim on your policy and each insurer will have its own claims team or claims process.
First things first, you should establish who you are insured with, which isn’t always obvious for everyone. This can be especially difficult if you are making a claim on a deceased partners policy.
You should be able to find some of the information that you need on either the bank statement or via online banking (if you have access to this). In most instances, this will show you the name of the insurer and the policy number.
Otherwise, if you have the policy documents for the life insurance plan that you are making a claim on, this will provide the claims details for that insurer. The other place where you should be able to find the claims department details will be online, usually on the insurers website. You may need to contact them over the phone or most insurers will have the option of filling in an online claim form.
If you need help with the then you can speak to an independent life insurance expert who can help you with this.