Nobody wants to think about the prospect of dying, or what they will leave for their loved ones when they are gone. But if you want to leave your family something in the event of your death, then putting in place a life insurance policy is one way of making sure that they’ll receive what could be a substantial lump sum.

Compared to other forms of cover, such as income protection or critical illness cover, life insurance policies are relatively inexpensive. The main reason for this is that, although death is unfortunately inevitable, the majority of people can look forward to a long and relatively healthy life. This means if you take out a policy in your 20s or 30s, there’s a very low likelihood that the insurance provider will need to make an early pay-out.

In fact, according to a large insurance provider, in 2020, the average age of claimants on their life insurance policies was 68 and their average pay-out was £39,094. According to their risk reality calculator, if you’re a 35 year-old male non-smoker and you intend to retire when you reach 68, you have a 6.9% chance of dying before you retire, while if you’re a woman with a similar profile, there’s a 4.9% chance that you’ll die before retirement.

But, if there is very little chance that you will benefit from life insurance in the short-term, why take out a policy in the first place?

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Why do you need life insurance?

There are two main types of life insurance policy – term insurance, which pays out if you die within a specified period of time, and whole-of-life insurance, which pays out no matter when you die.

Term insurance can be useful if you want to make sure that your loved ones have the funds they need to pay off any outstanding debts. You can set the term of the policy so it coincides with the term of, for instance, your mortgage.

Whole-of-life insurance can be a tax-efficient way of passing on your assets, as the beneficiaries usually don’t have to pay any capital gains tax or income tax on the payment they receive. However, there are tax implications if the payment takes the value of your estate above £325,000, as this could make it liable to Inheritance Tax (IHT) at 40%. This is why it’s important to talk to an IFA such as Grosvenor Wealth Management about the most appropriate policy for you.

Choosing the right life insurance policy

We will advise you on the best approach – for example, it may be beneficial to write your life insurance into a Trust to avoid IHT. But each case will be different, so we’ll give you the right guidance depending on your individual needs and circumstances, as well as those of the people you want to receive any pay-outs.

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Whatever stage you’ve reached in your life or career, taking out the right life insurance policy can give you peace of mind that if anything, unfortunately, did happen to you, your loved ones would have some level of financial security.

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