Financial Back to Basics: LIFE INSURANCE - YouTube

Welcome back YouTubers. 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 they're expected  

to cover your life for and so generally they are  quite expensive and in a moment I'll just give you  

a comparison for premiums in terms of a decreasing  term, a level term and a whole of life policy  

just so you've got a rough idea of the differences  in the premiums. Whole of Life is a key insurance  

policy for inheritance tax because what you  can do is, if you know you're going to have  

an inheritance tax liability you can take out a  whole of life insurance policy that will pay out  

an approximate value of the inheritance  tax your estate is likely to pay.  

So you can set that up so that on the day you pass  away the Whole of Life insurance policy would pay  

out the benefit to whoever you nominate and then  they have the cash proceeds straight away to be  

able to pay your inheritance tax bill. So now  I'll just give you some premiums - a rough idea  

so you know exactly sort of what sort of premiums  you can expect to pay. For a healthy couple in  

their mid-30s wanting £100,000 of life cover  the premiums would be approximate as follows:  

for decreasing term assurance you'd be looking at  about £8 per month over a 25-year term and that  

is on a joint life first death basis. So what that  means is for £100,000 of decreasing term assurance  

cover, so the day you take the policy out is worth  £100,000 but that will slowly decrease every month  

you pay your premiums until the end of the policy  and the sum assured would be effectively £0.  

So it's a 25-year term policy so after 25 years  have passed the policy would just come to an  

end if it's not being claimed on. And joint  life first death means that for a couple,  

the first person to pass away the pay out would be  made and then the policy comes to an end. You can  

have joint life second death, so for a couple it  would only pay out on the second of the couple to  

claim / pass away within the term of the policy.  Typically mortgage cover is done on a joint life  

first death scenario because you would want the  mortgage to be cleared if the first person of a  

couple were to pass away so the remaining person  doesn't have to cover the mortgage payments. For a  

level term assurance policy, for a healthy couple  in their mid-30s for £100,000 you'd be looking  

at just less than £10 a month over a 20-year term  for joint life first death. So not much difference  

there but the term is slightly shorter by five  years, the premiums are slightly more expensive  

and the joint life first death is the same. So  level term assurance is slightly more expensive  

than decreasing term assurance. Now here's the big  difference is the Whole of Life - so for a 30 year  

old couple wanting £100,000 of cover on joint life  first death you'd be looking at around £95 per  

month. So you can see there the massive disparity  between £8 a month for decreasing term assurance,  

£10 a month for level term assurance and £95 a  month for Whole of Life. But these are indicative  

only just to give you an idea of the different  types of cover and the different types of premiums  

you would have to pay. Generally Whole of Life  is done on a joint life second death if it is for  

inheritance tax mitigation because the inheritance  tax bill would usually be due on the second death,  

because for a spouse - spouses tend to leave their  estate to each other and in that scenario there's  

no inheritance tax bill, so it's generally then  when the final spouse passes away that the Whole  

of Life policy would pay out. Life cover tends  to have Terminal Illness cover included in it  

and that means that if you have an illness  that has less than a 12 month life expectancy  

generally the policy would pay out even though  you're not yet deceased, but you would have to  

have a doctor sign to say that they believe your  life expectancy is less than 12 months. You can  

also include waiver of premium for these sorts of  policies so that means if you're out of work for  

a set period of time and you can't afford your  premiums, you can notify the insurance provider  

and they will either cover your premiums for  you or waive them for a set number of months  

so that your policy still remains live, because  if you stop paying your premiums it means your  

policy will lapse and you just won't have  any benefit if you pass away, so it's really  

important you keep those premiums up if you want  your policy to continue. You can also hold these  

sorts of policies in trust so that is important  for the Whole of Life because if you don't want  

to add more money into your estate - you want to  make sure it's moved out of your estate - so it  

is important to put Whole of Life policies in  trust for other people, and certainly that can  

be helpful in terms of speeding up the process  of having money paid out because it means that  

money then doesn't have to go through your estate  to be paid out to your beneficiaries - it can go  

straight to your beneficiaries and it certainly  speeds things up and you don't have to wait for  

Probate to be passed. That's all guys. I hope  that's been helpful and I'll see you next time.