Preparing for the worst, if you have dependants, is a vital part of financial planning. After all, no one wants to think of their family struggling to pay bills or losing the roof over their heads, should they die.
Life insurance policies are a straightforward way to protect your family.
Life insurance is a type of protection that will pay out a lump sum to your dependants should you die during the policy’s term. This money can be used to pay off a large debt, such as a mortgage, or to supply your family with a monthly income to replace yours.
There are a number of different types of life cover available including level term, joint, family, and mortgage life insurance. The policy you choose will depend upon the amount of cover you require and the term you wish to be insured for.
The price you pay will depend upon the level of risk you pose to the insurer: how likely is it that you will pass away during the term of the policy?
If you are young, don’t smoke and are in good health, the more unlikely it is that you will die during the policy’s term, and the cheaper your insurance will be. As we get older and the risk of dying increases, so too will our premiums.
Most insurers will ask about your job and hobbies when calculating your risk. While stamp collecting and reading are unlikely to affect your premiums, riskier professions and hobbies, such as working in the Armed Forces or paragliding in your spare time may increase the cost of your policy.
You will be asked if you have lived overseas for extended periods of time, or if you have ever been turned down for life insurance in the past. You are also likely to be asked to answer some questions regarding your health.
Insurers will be keen to know about your lifestyle and medical history.
Smoking, drinking and having a high Body Mass Index (BMI) can put you at higher risk of serious health problems such as cancer, heart disease or strokes, for example. This increases your level of risk and will drive up the cost of premiums.
If you have health issues, either at present or in the past, you are likely to be asked about any treatments you are currently receiving and how the issue impacts your life. What’s more, providers are not only interested in your medical history. Hereditary diseases that run in your family may also affect your premiums, even if you show no signs of them at present.
Providers will use the information you supply to calculate the risk you pose and may ask for permission to contact your doctor for a medical report to find out more. In some cases, insurers may request that you undergo a medical examination with a doctor.
If you are in poor health, you may be concerned that the life insurance policy you will be offered will be expensive, or that you may not be offered cover at all.
But interestingly, it is possible to obtain life insurance without medical questions.
You’ve probably guessed that if you are young, in good health and don’t smoke or drink excessively, chances are you will be offered life insurance without a medical exam as a matter of course. You pose a low risk to insurers, and the likelihood of them having to pay out will be deemed minimal.
But if you aren’t so young and have a number of health issues, there are life insurance policies available that won’t ask you to supply a medical report from a doctor or have a medical exam.
First up is whole of life insurance. While a standard level term life insurance policy covers you for a set number of years, after which the policy ends and will no longer pay out, whole of life insurance, also known as guaranteed acceptance, covers you until you die. So, even if you live to see 130, your family is guaranteed a lump sum payment upon your death.
And the good news is, most whole of life policies offer guaranteed life insurance with no medical questions asked or medical examinations required.
There are 3 types of whole of life insurance:
Also known as standard or balanced, a non profit whole of life insurance policy will pay an agreed lump sum to your dependants upon your death, no matter when that is. The insurer will balance out your monthly premiums and fix them, so you know they will never increase. However, as a result of this, monthly premiums tend to be quite expensive.
In this case, an insurer will guarantee to pay a minimum lump sum payment to your dependants upon your death.
However, in this case, your monthly premiums are pooled with other people’s premiums and invested each month into the company’s with profits fund.
Should the fund do well, you will get a share of the annual profits. This money will be added to your guaranteed lump sum in the form of a bonus and so will permanently increase your pot of money. A final terminal bonus is also paid when you die, which can substantially increase the payout received by your dependants.
However, premiums for with profits whole of life policies tend to be significantly higher than non profit policy premiums.
With a flexible, or unit linked whole of life policy, you agree on a set monthly premium and the level of cover you would like with your insurer.
Each month, your premium is used to buy units in one of the stock market funds offered by the life office. The insurer will then calculate how much your cover for the next month will be and cancels just enough of your units to pay for it.
As the number of units held accumulate (and each unit hopefully increases in value) so the policy grows in value. When you die, your dependants will receive the agreed level of cover lump sum from the insurer, as well as the units held in the policy. It is also possible to review flexible policies at any time and alter your level of cover and monthly premiums as your needs change.
If you choose a low level of cover with your insurer (say £20,000) the monthly cost will be low, meaning you will build up more units. Provided the units increase in value, this can be a good way to obtain high levels of cover at a very low cost.
However, if you choose a high level of cover (say £300,000) your monthly cost will be higher. The insurer will need to cancel more of your units to pay for it, meaning the units will not build up very fast.
What’s more, should the units under-perform you could end up with insufficient units to sustain cover. In this case, you will need to decide whether to increase your monthly premiums to make up the shortfall or reduce the level of cover.
For this reason, insurers tend to review flexible policies after the first ten years to check they are on track, and every five years thereafter.
As you’ve probably guessed, as whole of life cover offers guaranteed life insurance without a medical exam that will pay out no matter how old you are when you die, it is not going to be the cheapest option.
On the plus side, not all whole of life policies require you to pay your premiums until you actually die. Some agree that once you’ve paid for a certain number of years or reached your 90th birthday, your cover will continue but your premiums will cease.
It is usually possible to cash in or surrender a whole of life policy early. However, as there are typically hefty penalties and charges payable you could end up with a disappointingly small sum compared to what you paid in.
Another option for those looking for life insurance with no medical questions or examinations is an over 50s life policy.
Like whole of life insurance, over 50s life policies offer life insurance with no medical exam.
This age-specific type of life cover is typically available to 50 to 85 year olds and promises to pay your dependants a cash lump sum when you die. Not only does it offer life insurance without a medical exam or health questions, provided you fit in the age bracket, you are guaranteed to be accepted.
It’s worth noting that the lump sum payments with over 50s plans are far smaller than other life insurance policies and are often taken out to cover funeral expenses. Rather than looking at sums of £100,000+ for instance, over 50s plans can pay out as little as £1,000.
Monthly premiums are smaller, but there tends to be no cut-off date, so you must pay your premiums until you die. Once you sign up, you are locked in: the policies have no surrender value and if you miss one payment, your policy will be invalid. As a result, you can end up paying far more in premiums than the lump sum received.
For example, a healthy 50 year old paying £10 a month for a £3,000 lump sum, who lived to see their 100th birthday could have paid £3,000 in premiums by the time they were 75.
However, they would have to pay the further 25 years worth of premiums (another £3,000) or their family would receive nothing upon their death. In this case, it would have been far better to have saved or invested that money instead.
That said, this type of policy could be more favourable to those in poor health.
If the same 50 year old were to die after 4 years, they would have paid £480 in premiums, but their beneficiaries would still receive the full £3,000.
It is worth noting that most over 50 policies stipulate that they will not pay out until after 12 or 24 months.
The final type of life insurance without a medical policy available comes from a different source altogether: your employer.
Many companies offer life insurance, or death in service cover as part of their benefits packages. And the good news is, employees are often accepted without having to submit any medical information.
Enrolment is often automatic or linked to joining the company pension scheme. Some schemes even allow you to pay a little more to provide the same benefit to your spouse or partner. Speak to your employer to find out if you are covered and if so, how much for.
While life insurance with no medical exams or reports required might sound easy and appealing, in reality this cover tends to be more expensive than other types of life insurance. Over 50s insurance is also unlikely to pay out a large enough sum to financially support a family.
If you are unsure, seek financial advice from an independent advisor. Take some time to apply for quotes for all types of life insurance and you can decide on the most appropriate cover for your needs.