An Introduction to Life Assurance 

Why is it that we find it so hard to buy life insurance? Is it that we don't like thinking about life insurance because we prefer not to face up to our own mortality? Or is that we've become complacent, having read so many stories about people living longer? Or have our financial worries become more immediate, thanks to the pressure of ever-bigger bills and record levels of personal debt?

Whatever the reasons, there is a huge gap between the protection which we need and the cover that we actually have. Indeed, according to leading reinsurance company Swiss Re, the "protection gap" is growing every year, because our life cover is failing to keep up with our financial needs.

In 2002, Swiss Re estimated that the protection gap for life insurance was £2 trillion (that's £2,000 billion or £2,000,000,000,000). The company now estimates that this gap has widened to £2.5 trillion, which is an increase of £500 billion in four years – and that is in the UK alone!

For expatriates in the gulf region, the need for life assurance is greater than for most. Just driving on the roads can be like playing Russian Roulette; the amount we fly, the long hours we work and the leisure activities we participate in also substantially increase our risk of death.

Add to this the fact that our families would need money to repatriate if the worst happened, life assurance for expatriates is essential. Thankfully, due to a price war between providers and lengthening life expectancy, life insurance is now cheaper than it's ever been.

With the above in mind, this guide explains the basics of what life assurance is, who needs it and how much we need.

What is life insurance?

Essentially, it's protection for you, your family and your lifestyle. You pay premiums to an insurance company, usually monthly or annually. In return, the insurance company will pay out an agreed amount - the 'sum assured' - if you die during the life of the policy. In essence, the whole idea of life insurance is to pay off your debts and support your dependants by replacing some or all of your income if you die.

Your premiums will vary according to a number of factors, including the sum assured and the length of your policy (its 'term'), plus individual lifestyle factors such as your age, occupation, gender, state of health and whether you smoke. (You could save a fortune by giving up smoking, as most insurers will quote lower premiums once you've quit for a year or more!).

Life insurance is essentially a gamble. Neither you nor your insurer wants you to die while you're covered, but your premiums are priced to reflect the risk of this happening. Of course, if you outlive your policy, it brings you nothing but 'peace of mind'. Usually, you only stand to gain financially if you die, which is a high price to pay!

Who needs it?

Mortgage lenders encourage all borrowers to take out life insurance, but it's only necessary if you have a partner and/or children. After all, if you're young, free and single, who stands to lose out if you kick the bucket? At the very worst, your mortgage lender will sell your house to pay off your home loan, which is no big deal! Why not consider Income Protection Insurance instead, which pays you an income if you can't work because of sickness, injury or disability.

However, at the very least, you should aim to pay off your debts and leave your wife and kids with something to live on if you've passed away. Amazingly, a quarter of homeowners don't even have enough life cover to pay off their mortgage if a breadwinner dies, which is just crazy!

On the other hand, although it's daft to put your family at risk of financial hardship, it's equally bone headed to over-insure yourself, aiming to leave your family a Lottery jackpot if you die. After all, big payouts mean big premiums!

Remember that if you have something to lose, you have something to insure. Don't forget to insure non-working partners, as it costs a small fortune to replace a housewife/husband. It's tough getting by when you've no-one to run your home and take care of your kids. Don't make the mistake of insuring yourself up to the hilt and leaving your partner unprotected.

Where can I buy it?

The rule with life insurance is to shop around; an independent financial brokerage such as Candour Consultancy will be able to quote for the major providers and advise on the most competitive policy for you. This will save you a lot of work. If you buy life insurance from your mortgage lender, you'll pay well over the odds, because these policies can cost several times as much as the most competitive policies. Bear in mind that a saving of $10 a month adds up to $3,000 over 25 years!

The cost of life insurance has tumbled in recent years, which means that policies you've bought in the past may now be overpriced - even though you're a few years older. As such, it may be worth reviewing your existing cover; this is also the ideal opportunity to review the level of cover you require.

Another smart move is buying separate 'his' and 'hers' policies, instead of a 'joint life, first death policy', which pays out once and ceases after the first death, leaving the survivor uninsured. By buying two individual policies, you can get two payouts - potentially twice as much cover - for just a few dollars a month more. Also, individual policies also make life easier when it comes to inheritance tax, and if you separate or divorce, which is a lot less hassle than dividing up a joint policy!

How much cover do I need?

If you have a partner or children, the first thing you need is enough cover to pay off your mortgage and other debts. After that, you need cover to replace at least some of your income. Realistically, cover of ten times your gross income (your salary before deductions) should give your dependants a reasonable standard of living and keep the wolf from the door.

Of course, how much money a family needs will vary from household to household so, ultimately, it's up to you to decide how much money should leave your family with a reasonable standard of living.

Perhaps a better question is "How much cover can I afford?" - $20 a month will buy a non-smoking 35-year-old man at least $200,000 of life insurance for a twenty-year policy.

One thing is clear: the UK is grossly under-insured when it comes to life insurance. One report estimated the gap between the cover we have and the cover we should have at a mind-boggling $2,500,000,000,000!

For how long should I be covered?

It makes sense to cover yourself until your normal retirement age, usually sixty or sixty-five. However, if you have young children, you should cover yourself until they are financially independent, which usually comes after they have left school or university and are earning their own money. There's no point in buying a policy that lasts until you reach, say, eighty, because your children will have fled the nest and, all being well, you'll be enjoying life as a pensioner.

Keeping the taxman at bay!

Although a payout from a life insurance policy is tax free, it could form part of your estate and be liable to Inheritance Tax (IHT), which could gobble up to two-fifths (40%) of your payment.

The simple way to avoid IHT is to place your policy 'in trust', which enables any payout to be made directly to your dependants, neatly avoiding the taxman, your estate and any Will. Many people use a 'flexible' trust, which allows you to control over what happens to your payout after death and will speed up payment. However, it cannot be used for policies that are assigned to (earmarked for) your mortgage lender.

How can Candour Consultancy help?

Candour Consultancy advise on a wide range of term and whole-of-life life assurance policies.

Our fully qualified consultants will be able to advise on a suitable level of cover for your personal circumstances and provide you with the most competitive quotation. With Candour Consultancy there is no charge for our advice, no obligation and no hard sell.

Click here for a no-obligation quotation for your life assurance