How to choose which plan is best for you

What do you want the plan to do?

Repay a mortgage or loan on your death

If the mortgage is a REPAYMENT (capital and interest) then mortgage protection, also known as decreasing term assurance, is appropriate. This is designed to pay off the loan, and therefore the amount of cover decreases in line with the outstanding loan. It is difficult to arrange supplemental policies for new (larger) mortgages as the cover and term won't match the new (single) loan. Most companies recommend that you start a new policy and cancel the old one relating to your old loan (in that order).

If the loan is INTEREST ONLY (endowment style) then level term assurance is appropriate. The level of cover remains the same throughout the term because the loan remains the same. Level term assurance is more expensive than decreasing term assurance, because there is a greater level of cover later in the term of plan when you are most likely to die because you are older. A term assurance plan does not accrue a value. It will only pay out if you die (or suffer a critical illness if covered) during the term. Alternative arrangements must therefore be made to repay the loan.

To provide money to your dependants after your death

If you wish to leave a LUMP SUM TO YOUR DEPENDANTS after your death then level term assurance is appropriate. Most Independent Financial Advisers recommend a sum in the region of 10 times your salary to run until the dependency ends, i.e. when your children are 18 or 21. This is based on the capital being invested and paying 5% income, which is estimated to equate to what your dependants get from your salary.

Alternatively, a cheaper option is Family Income Benefit. This plan provides an agreed "income" after your death to the end of the term. This is a decreasing term assurance and is therefore cheaper than level term assurance.

Writing your Life Assurance in Trust

When you set up a policy to provide the benefit to your dependents it may be beneficial to put the plan in trust. The trust becomes the owner of the policy benefits in the event of a claim. A flexible trust should not normally be used for mortgage related policies.

The main reasons for writing a policy in trust:

• The trust structure can help minimise inheritance tax. This is because the policy benefits are paid into the trust, which is outside of your estate. Therefore when your estate’s inheritance tax liability is calculated the insurance is not included. For current inheritance tax figures and for more information please click here
• When a life assurance policy is written under trust the benefit does not go through probate and can therefore be paid out more quickly.
• To protect the benefits from creditors of your estate.

You do not have to write your policy in trust from the outset and if you prefer you can add the trust at a later stage once the policy is running.

NOTE: There are other reasons for setting up a policy under trust, and it may not be suitable for everyone. We recommend that if you are still unsure about whether or not to use a trust you should seek legal advice.

Each life assurance company has their own trust application and guide to completing them below.

Trust documents