Beginners' guide to Protection

Life cover

Life insurance is the simplest form of protection you can buy, offering basic cover for a fixed number of years. In a nutshell it’ll pay out a lump sum if you die during the term of the policy. Some policies may also offer an income as an alternative to a lump sum. Many policies also pay out if you’re diagnosed with a terminal illness during the term and have been given 12 months or less to live.

You could structure your life cover to suit your lifestyle. You can take out cover where the cash sum increases each year so the amount of cover keeps up with the cost of living. This is known as an increasing or an index linked policy. The level of cover will rise each year in line with the Retail Prices Index (RPI) which is a measure of inflation.

Alternatively, you may want the level of the life cover to reduce each year. This is often the case when a policy is taken out to cover a mortgage where the amount of debt it needs to cover falls — assuming mortgage payments are met. The premiums you pay will stay the same but generally, this type of cover is less expensive.

 

If you have a young family for example, you may feel that a regular monthly income is more appropriate than a cash lump sum. If that’s the case a family income policy or choosing a monthly income option, if the cover offers this, may be a better option.

Finally, you may want the life cover to last throughout your lifetime. This type of insurance is often referred to as Whole of Life insurance and it would guarantee a payout when you died, in line with the terms of the policy.

Payouts from a life policy are free from income tax or capital gains tax. However, inheritance tax (IHT) may be payable on the cash sum if the payout, when added to the deceased’s estate, puts the whole estate over the threshold for paying no IHT. You can opt to write the policy in trust so it doesn’t form part of your estate. However writing your life cover in trust is a complex issue and you should always seek advice from your solicitor or financial adviser before doing this.