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Life cover
There are a variety of products that can be used to pay off your mortgage in the unfortunate event of your death. All will involve some degree of medical screening questions which will influence the premium payable.
The terms life insurance and life assurance are often used interchangeably but they are actually different products. Even we refer to some insurance products as assurance!
Life insurance
This is a fixed term policy that will pay out in the event that you die during the insured period. You will only pay the premiums for the period of insurance that you buy. It is often referred to as term insurance, and can be decreasing, level or increasing. Some policies will pay out before death if you are diagnosed with a terminal illness. It is usually the cheapest form of life cover available.
- Decreasing cover - the amount of cover decreases each year by a given amount. This usually represents the fact that your mortgage is being repaid so the amount you need to pay it off also decreases each year. The rate at which the policy decreases is set to be slower than the rate at which your mortgage will decrease to ensure there will always be enough to pay off the mortgage.
- Level cover - the amount of cover stays the same during the whole policy. If the cover if used to pay off a mortgage then any surplus is paid to your Trustees (see below) or estate.
- Increasing cover - inflation has a nasty habit of devaluing money so you can choose for your cover to increase each year to counteract the effects of inflation.
- Guaranteed or reviewable premiums - guaranteed premiums don't change throughout the policy term whereas reviewable ones do. It is not possible to have guaranteed premiums with some increasing cover policies.
Life assurance
This policy is not fixed term and will cover you until you die, at which point it will pay out. It is often referred to as a Whole of Life plan. There are many variants and it is more expensive than life insurance. Some policies require you to pay premiums until you die, whilst others allow you to stop paying but maintain cover once you reach a certain age.
As the end date of the policy is not known, you can't have decreasing life assurance. Most policies generally allow you to increase your cover in response to various life events, though this will also mean your premiums will increase.
Trusts
We always recommend that you place any life policy in trust. This takes the proceeds outside of your estate and therefore avoids any inheritance tax liability. It also speeds up the claim process as it does not have to wait for certificate of probate to be issued. You will need to provide the details of at least two Trustees who will carry out your wishes in relation to the policy proceeds when you die.
For more information and to discuss your requirements, get in touch with us.
