Issues to Consider

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Joint Life Policies

Instead of you and your partner taking out separate insurance policies, you could take out a joint life policy. A 'first death' policy covers both your lives and pays out once on the death of the first of you to die. A 'last survivor' policy pays out once on the death of the second of you to die. For protecting dependants, the 'first death' option is usually the more appropriate. A joint life policy will be suitable only if you both need to insure for the same amount. For example, a joint life policy may be ideal for paying off a mortgage in the event of one of you dying, but less suitable as a means of replacing lost income since the income needs will vary depending on which of you has died.

Writing Life Insurance In Trust

If the proceeds of a life policy are paid to your estate on death, there can be a long delay before the money becomes available to your dependants and there could be inheritance tax to pay on the proceeds. Writing an insurance policy in trust avoids these problems by ensuring that the policy pays out direct to your dependants, bypassing your estate altogether.

Most insurance companies give you the option of writing a policy in trust at no extra charge and have standard forms for doing this. Policies on your life (but not joint life policies) which are to benefit your husband, wife or children can be very simply and easily written in trust using the Married Women's Property Act 1882. The form of trust set up under the terms of this act cannot be altered later, so you need to make sure that it really does suit your requirements.

Life-of-Another Policies

An alternative is a policy that pays out direct to someone else if you die. For example, if you want to ensure that your husband or wife, or unmarried partner is financially secure if you were to die, you should consider one of these options:

• Own-life policy : You take out life insurance to pay out on your own death. To prevent the payout forming part of your estate and to avoid delays, you write the policy in trust for the benefit of your spouse or partner.
• Life-of-another policy : Your husband, wife or partner takes out life insurance based on your life. If you die, the policy pays out direct to him or her, so there is no need to write the policy in trust.

With all types of life insurance, at the time the policy is taken out you must have an insurable interest in the life of the person covered. This means that you must stand to lose financially if he or she were to die. You are assumed automatically to have an unlimited insurable interest in your own life and in that of your husband or wife. When it comes to other people, your insurable interest is limited to the amount that you would lose if they died. Therefore, a life-of-another policy cannot be taken out on someone with whom you have no financial connection.

The main disadvantage of a life-of-another policy is if your relationship breaks down: your former spouse or partner owns the policy and has the absolute right to the proceeds if you were to die.

You may need to take out your own policy to ensure that any children would be financially provided for. On the other hand, where a relationship has already broken down, a life-of-another policy taken out by a parent, with care of the children on the life of the absent parent, can be useful as a way of protecting the family against the loss of maintenance payments in the event of the absent parent dying.

Waiver of Premium

Both term insurance and whole-of-life policies may include 'waiver of premium'. This lets you suspend your premiums for a certain period in specified circumstances: for example if you are unable to work because of illness. You need to check the policy wording carefully to see precisely what conditions apply. Not all policies offer the waiver. With those that do, the waiver is sometimes automatically included and sometimes an optional extra. Typically, it could increase your premiums by around 6%.

Waiver of premium is a relatively cheap and straightforward way of making sure that your life cover would continue even if your finances were temporarily strained.