Jane Baker writes about a feature which could keep the costs down if you need extra life cover in the future.
As our "Let's Talk About Money" campaign continues, we're going to take another look at life assurance. Today, I'll show you a feature to look out for when choosing your policy which could help you keep the costs down if you need extra cover in the future.
It's fairly common to take out life assurance to cover your mortgage when you buy your first home. While this is a completely rational decision to be honest, it's a little short-sighted because protection needs often don't stop there. But there's a snag; you don't know in advance whether extra cover will be called for as your life changes, which makes it difficult to plan for the future.
The need for life cover tends to rise as key events in your life occur such as getting married or having a baby, as these are the times when others may depend on you more heavily for their financial security. It may seem sensible to apply for a new life policy to provide the extra protection but this isn't always necessary or cost-effective.
When you first take out a life cover plan I suggest you consider one that offers what insurers refer to as Guaranteed Insurability Options (GIOs). Never heard of them? I'm not surprised. They're often buried in the terms and conditions. But GIOs are written into some term assurance policies allowing the policyholder the flexibility to increase their cover without the need for further underwriting.
Underwriting is a process which quantifies the risk you represent to a life assurance company and is used to calculate the premiums you'll pay for your cover. This is why life insurers ask you so many questions when you apply for a policy. They're trying to work out the probability that you'll need to make a claim during the policy term. Or more accurately the probability that you won't need to claim!
If you can increase your life cover on certain key life events without being underwritten then crucially, you won't be penalised if your health has deteriorated since you first took out the policy. In fact, your health and any other changes to your lifestyle won't even be taken into consideration. If you apply for a new policy to increase your protection, you will need to be underwritten again and could potentially face higher premiums if your circumstances have altered in such a way that you now represent a greater risk.
Remember not all companies offer GIOs and those that do interpret them differently. Here I've looked at Royal Liver's Progress plan purely as a typical example to give you an idea of how GIOs work but there are plenty of other insurers out there that may offer you a suitable policy.
Events when GIOs can be exercised with Progress:
- Marriage/Civil Partnership
- Childbirth/Adoption
- Career Change/Salary Increase
- New Property/Increase in Mortgage Loan
- Joint Life Separation - the life cover can be changed from joint life to two single life policies in the event of separation or divorce. The level of benefit remains the same on both plans.
You can exercise a GIO as long as you're under 55 and were originally accepted at standard rates. By this I mean no loadings were added to your premium at the outset because you were a greater than average risk. The maximum increase you can apply for is either 50% or 100% of the initial level of cover depending on the specific life event which has taken place.
You'll need to pay the premiums appropriate to your current age at the time you ask for the upgrade in your cover, so the amount you pay may not be the same as your original rates. But this doesn't necessarily mean you'll have to pay more for your extra cover because life premiums have generally reduced in recent years even if you're a bit older.
Why not see if The Motley Fool Insurance Service could find you a suitable plan? Get a quote now! (But don't forget to check the terms and conditions before making your decision to see if GIOs are on offer.)
The comments above are the opinions of the author only and do not represent advice specific to your circumstances.
This article has been approved and issued by Direct Life & Pension Ltd who are authorised and regulated by the Financial Services Authority.
The Motley Fool Insurance Service and The Motley Fool Life Insurance is a trading style of The Motley Fool Limited. The Motley Fool Life Insurance is provided and administered by Direct Life & Pension Services Limited. The Motley Fool Limited is an introducer appointed representative of Direct Life & Pension Services Limited, who are authorised and regulated by the Financial Services Authority. Registered Office: The Bailey, Skipton, North Yorkshire, BD23 1DN.