In the event of an unexpected death, it’s crucial to make proper financial provision to soften the blow for those you leave behind. It’s all too easy to convince yourself that day-to-day life is complicated enough without having to worry about who’s going to settle next month’s mortgage or gas bill payment after you’ve gone.
We believe that future-proofing the family finances doesn’t have to be expensive or stressful. That’s why we have launched Habito Life Insurance: a super fast, easy, and non-intrusive life insurance policy woven directly into the mortgage journey. So you can stop worrying about the future and get on with enjoying the here and now.
What is a life insurance policy?
Life insurance policies are designed to pay out a set amount of money to your dependants in the event of your death, usually as a lump sum. You pay a monthly ‘premium’ – a payment to the insurance company, and in return you get peace of mind that your family will be looked after financially if anything should happen to you.
The majority of life insurance policies are term policies, which means they run for a fixed number of years (perhaps 20 or 30) and will only pay out if you die within that time. This makes them ideal insurance to cover a mortgage or the cost of raising kids, as you can set the finish date to coincide with your final loan payment or the kids (hopefully) leaving home. There are two main types of term policies: level and decreasing.
A level term policy is a popular way to cover interest-only mortgages. A level term policy is one where the level of cover is guaranteed to be the same for a given period of years. The most common terms are 10, 15, 20, 25 and 30 years.
A decreasing term policy is a popular way to cover repayment mortgages. How does this work? The amount insured on your policy follows your mortgage debt as it decreases over the years, until both reach zero at the same time. This means the policy will always cover the outstanding mortgage, but the monthly premiums will generally be lower than a level term or whole of life policy. However, this policy isn’t suitable for an interest-only mortgage where the capital debt has to be paid off in one lump sum at the end of the loan term.
Alternatively, if you’d prefer a policy that’s guaranteed to pay out regardless of when you die, you can take out a whole of life policy with no end date attached. The hitch? The monthly premiums will be considerably higher than a term policy.
What things can affect my premium?
Age, health, lifestyle and occupation all play key roles in determining your risk rating in the eyes of life insurance providers, and consequently how much they want to charge you each month. That’s why a hard-drinking 55-year-old smoker who works on an oil rig will have to pay an awful lot more than a teetotal 25-year-old who works in an office – you don’t need to be an insurance mastermind to work out which one’s more likely to require a payout.
Whatever your risk rating though, don’t be tempted to lie on the application form. When it comes to life insurance, bad habits are best out in the open. Your premiums will be more expensive as a result, but you won’t leave loved ones without financial support when the insurance company finds out you didn’t tell the truth and refuses to pay out.
Do I need life insurance?
Having the security blanket of a life insurance policy can make a great deal of sense, especially when premiums start from as little as a few pence a day. But this doesn’t apply to everyone. For instance, if you’re young and single without any dependants relying on your salary to cover the mortgage payments and weekly shop, then you’re probably better off saving for a rainy day. After all, who’s going to be left to enjoy the payout when you’re gone?
To work out whether life insurance is right for you at this stage, you need to ask yourself whether your nearest and dearest would be able to cope financially if you passed away. For instance, could they still afford the monthly mortgage payments and day-to-day expenditures of running a home and looking after a family without your salary coming in? Or would they struggle to make ends meet? The same question still applies if you’re a stay-at-home parent – life insurance could help cover the childcare and housekeeping costs if you’re no longer around.
If the answer is they’d struggle, then the next thing is to use a life insurance calculator to work out the right amount to cover yourself for. Set the payout too high and you could end up over-tightening your belt to pay needlessly inflated premiums. Set the payout too low and it’s a false economy – the whole point of life insurance is to provide security, so the last thing you want to do is leave your loved ones short-changed if you die.
Will I need to have a medical?
The answer to this depends on your personal health and lifestyle profile, as well as your provider. On most application forms, you’ll be asked about your sex, age, height and weight to determine your Body Mass Index. You’ll also be asked about your family medical history to see if there are any hereditary illnesses that could affect you later in life. Finally, you’ll have to declare any previous or existing medical issues and, of course, vices such as smoking or excessive drinking (even if you gave them up a few months ago).
If your profile flags up any warning signs, then most life insurance providers will ask you to undergo a more in-depth, face-to-face medical examination to establish just how much of a risk you are.
We have focused on making our application process as non-intrusive as possible. With a Habito policy we will ask for your GP details so that we can randomly sample a small proportion of our customers to verify medical information that has been given to us. This means that you don’t need to book doctor’s appointments or submit years of medical history. This will not affect your policy but it will help us better build our risk profile in the future.
How do I make a claim?
Having to search through mountains of paperwork when you’re recently bereaved only adds to the stress, so ideally the insured will have provided you with their life insurance policy details well before their death. That way, all you have to do is contact the insurer to let them know you want to make a claim. If you don’t know the details or can’t locate the policy document, you could check bank statements for any regular payments to an insurer or insurance broker, or contact the Association of British Insurers.
Life insurance providers do their best to make the claims process as stress-free as possible to avoid unnecessary upset for the bereaved, but there is certain information they will need to proceed further:
- Name of the policyholder
- Original death certificate
- Policy number
- Your name, contact details and relationship to the policyholder
They can then send you a claim form to complete along with details of which original documents you need to send them, including the death certificate (you can get multiple copies of this when you register the death). Once the insurer has received all the necessary documents and approved the claim, then payment can usually be made pretty swiftly.
Will my loved ones have to pay inheritance tax?
That depends on whether the policy was written ‘in trust’ or not. The insurance provider can tell you the answer to this. If your policy was written in trust, then the payout amount won’t be added to your estate and therefore can’t be liable for inheritance tax (IHT), which is charged at 40%. It also means that your loved ones will receive the payout quicker than if the policy isn’t in trust.
If the policy isn’t written in trust, the executors of the will must apply for probate. This is a legal process to confirm the executor’s right to deal with your estate, and this process can take months. Furthermore, the payout will be added to your estate, so will be subject to inheritance tax, meaning a potentially reduced payout for your loved ones.
You should speak with a financial adviser if you’d like to know more about inheritance tax.
Policy: A policy is a legally-binding contract between the insurer and the policyholder, and details the exact terms and conditions of your life insurance cover. When you take out a policy, the insurer will provide you with a document outlining exactly what your life insurance includes and excludes.
Premium: The premium is the amount of money you pay your life insurance provider, either monthly or annually, in order to keep your policy active. Your premium can be affected by a range of different factors, including the amount and type of cover you need, your age, occupation, lifestyle and health.
Term: The term is the length of time you’d like your policy to last for, and you’ll need to specify this when you take out life insurance cover. You can choose anywhere from a fixed number of years (known as a term policy) to the rest of your life (known as a whole of life policy).
Term policy: A term policy is by far the most popular type of life insurance cover in the UK. It lasts for a fixed length of time, such as 25 years, and will only pay out the agreed lump sum if you die during that period. If you live beyond the end of the term, the cover lapses and you receive nothing.
Decreasing term policy: Decreasing term life insurance (or mortgage term life insurance) also only pays out a lump sum if you die during the fixed cover period, but the payout amount gradually decreases over time and premiums are lower as a result. It’s usually taken out to cover a specific debt such as a repayment mortgage in the event of your death and so it tracks your loan term.
Whole of life policy: A whole of life policy is more expensive than a term policy because there is no fixed timeframe attached. It’s guaranteed to pay out an agreed lump sum to your loved ones regardless of when you die, as long as you’re still paying the premiums (or you paid them up to the age stated in your policy).
Medical: When you apply for life insurance, you’ll be quizzed about your health and lifestyle. Based on your answers, the insurer will then decide whether a more detailed medical examination is required to assess your application further. If you need a medical, the insurer will nominate a qualified doctor or nurse to carry out a full health check at no expense to you.
Probate: Probate is the legal process of dealing with someone’s estate – everything owned by the deceased, including money in a life insurance policy, property and personal possessions – when they die. The person (or persons) you nominate to deal with your estate and follow the instructions as laid out in your will is called your ‘executor’.
Habito Life Insurance is available exclusively to Habito customers. For more information about our life insurance offer, head here.