Financial Back to Basics LIFE INSURANCE

Welcome back my Blog. Today we're going back 

To basics. It's been a little while since I've done one of these and apologies for that, 

but today we're looking at life insurance.  Life insurance really has a place in everybody's 

financial plan. As it says it covers your life so if you should pass away it would pay out, and 

then that money could be used to clear a mortgage or to pay a lump sum to your beneficiaries, or 

to clear a loan - another type of loan other than a mortgage. So it really has its place 

because it can cover different types of things should you pass away. There are many different 

types of life insurance and really it depends on what you're trying to cover. Now you're obviously 

trying to cover your life, but for a lot of people the key thing they have life insurance for is 

to cover their mortgage debt. Now depending on the type of mortgage you have that will 

depend on the type of life insurance you need. If you have a repayment mortgage - so every time 

you pay a monthly repayment you're slowly owning a little bit more of your house or your flat every time you pay those monthly repayments - that means that ultimately your level of debt slowly decreases over time, so by the end of the term the amount you will owe the bank will be £0 because you would have been repaying it throughout the term of the mortgage and at the end of the at the end of the term there will be nothing left that you owe the bank. If however you have an interest only mortgage - therefore your outstanding debt remains at a level sum the entire time - so at day 1 you might owe £150,000 to the bank but at day 0 you also still owe them £150,000 and you have to find some way to repay that lump sum, whether that's by selling your property or finding a lump sum source from somewhere. But whatever you do you have to repay that debt. So there's a big key difference there in a reducing outstanding debt or a level sum of debt and depending on the type of mortgage you have that will dictate which type of life cover you 

need. For your decreasing debt you would be looking at a decreasing term assurance policy. 

You would set that up for the same term as your mortgage has, so if it's a 30-year mortgage term 

you would set your decreasing term policy up for 30 years and then the sum assured slowly 

decreases each month as you pay your premiums. But it's important that the premiums remain level. So the premiums will be the same throughout the term of the policy, it's the sum assured, which is the amount that would be paid out on your death, that is what reduces each month in line with your mortgage repayment or broadly in line, as in line as they can make it. If you have an interest only mortgage and you have that fixed sum that you need to repay on death then you would want a level term assurance policy, because the the amount that would be paid out would be the same whether you died on day 1 or day 300. It would be the same amount that would get paid out and therefore your interest only mortgage could be covered. It's important you set the terms up if you're covering a mortgage that the term is the same length as your mortgage term otherwise you'll 

find, especially with decreasing term assurance, you'll find that the sum assured depreciation is 

slightly out of kilter. I mean, they tend to be a little bit off but they can broadly be as close 

as you can get them. But it's important to make sure you have the whole term of your mortgage 

covered whether that's a repayment mortgage or an interest-only mortgage. The premiums of a 

decreasing term assurance policy are cheaper than a level term insurance policy and that is 

purely because the sum assured decreases every day that the the policy goes on for, whereas, 

as I've said, the level term policy the amount that would get paid out is the same throughout the 

term of the policy therefore the benefit is higher so the premiums reflect that. You don't have to 

have a mortgage if you want level term assurance or decreasing term assurance. So you don't have 

to attach these things to a mortgage. You could simply take one out if you wanted a fixed sum 

to be paid out to your loved ones on death. You could take out a level term insurance policy for 

£100,000 if that would suit your circumstances. Likewise a decreasing term assurance - that's 

unlikely to be quite so suitable - decreasing term assurance policies are more suitable for repayment 

mortgages - that's generally what they are for, but it is possible to set one up if you wanted 

to do it for your own circumstances. Another key type of life insurance policy is called Whole 

of Life. Now this basically has no end date - it just runs until you pass away. But because 

of that these can be very expensive policies. Because you could live to be 70, 90, 110 - the 

insurer has no idea how long.