* Bank writes down value of Westpac Life Insurance Services

* Costs and provision for record settlement increase A$415 mln

* Westpac to release dividend decision and FY20 earnings Nov. 2

SYDNEY, Oct 26 (Reuters) - Australia's Westpac Banking Corp said on Monday it would take an $870 million hit to cash earnings in the second half, due mostly to write-downs in the value of its life insurance business and the additional costs of a record fine.

The announcement, one week before its full-year results and dividend announcement are due, added uncertainty about the ability of the country's second-largest bank to resume investment payouts.

The A$1.22 billion ($870.4 million) hit to cash earnings also includes an increase in provisions related to customer refunds and litigation, and a write-down for capitalised software, the bank said.

Credit Suisse said the separate write-downs and provisions were already expected by analysts, following the A$1.3 billion settlement announced last month for allowing illicit payments, for which the lender set a further A$415 million aside.

In aggregate, however, they "may contain some 'sticker shock'" for the market, Credit Suisse said.

Westpac this year became the only one of Australia's four major banks to slash dividend payments in the first half of the year, as it took the largest bad-debt provisions of all majors for possible losses in the aftermath of the coronavirus pandemic.

That has left it with one of the weakest capital positions of the four majors. In total, the announced charges and provisions will reduce the bank's common equity tier 1 ratio by 24 basis points, Westpac said.

About A$568 million of goodwill will be written off at Westpac Life Insurance Services and Westpac's Auto Finance business. A further A$182 million will top up its customer remediation provision, the bank added.

An A$26 million pre-tax gain on the sale of its stake in Zip Co Ltd in the first half of fiscal 2021 partially offset the other write-downs, Westpac said.

It will report full-year results and its dividend decision on Nov. 2.

($1 = 1.4017 Australian dollars) (Reporting by Paulina Duran in Sydney and Nikhil Kurian Nainan in Bengaluru; Editing by Andrew Heavens and Peter Cooney)