“It will never happen to me!”
While it is not something we like to think about, life insurance can provide a lump sum payment to your beneficiaries in the event of your death. Knowing that funeral costs, mortgage payments and debts will be taken care of can take a lot off your mind, particularly when you have children or dependent family members.
Why you might choose life insurance
Life insurance won’t be right for everybody and it isn’t compulsory. However, you might choose to take out a life insurance policy if:
- You recently got married
- You have just started a family
- Your children aren’t financially independent
- You have a mortgage
- You have relatives who are financially dependent on you.
If there is a risk that the people you leave behind will not be able to pay off debts, mortgages and other bills, you might choose a life insurance policy to provide peace of mind.
However, if you are employed it is worth checking that you aren’t already covered before choosing a life insurance policy. Many companies offer life insurance as an employee benefit (usually called ‘Death in Service’ cover).
Factors that may affect your life insurance policy
As with other types of cover, there are factors that usually affect your life insurance policy, including:
- Your age
- Your health
- How long you want cover for
- How much cover you want
- Whether you smoke.
Types of life insurance
Despite its relatively simple form, there are several different types of life insurance policy to choose from. The right policy for you will depend on your circumstances but the main types include:
Term life insurance
This is life insurance in its most basic form. You choose the amount you want to be insured for and the length of time you want to be covered. If you die within that period the policy pays out to your beneficiaries. If you don’t die within the specified term, the policy doesn’t pay out and your premiums are not returned to you. There are different types of term life insurance:
Level term life insurance
Where the amount you’re covered for remains the same for the duration of the policy.
Decreasing term life insurance
The amount you are covered for decreases over the term of the policy. This might be right for you if your children are approaching financial independence and if your mortgage debt is reducing over time.
Family income benefit
Instead of a lump sum, this pays out a regular income to your beneficiaries until your policy’s expiry date. Policies can normally be level term or decreasing term.
Increasing term life insurance
The premiums and cover will increase over the policy’s term, which could be used to cover inflation or an increasing debt.
Whole of life insurance
As the name suggests, whole of life policies are ongoing, without any set term and will pay out when you die regardless of when that is. These policies tend to be more expensive than term life insurance for the obvious reason that they pay out regardless of when you die.
Whole of life insurance policies are also known as life assurance and have both a protection element and an investment element, so some of your money will be used to pay the premiums and some will be put into investment funds. The two main options for the investment element are unit-linked or with-profits.
The investment element means there is the potential to get back more than you invest but this is unlikely and it is important to understand that if the investment fund isn’t performing well enough to cover the cost of the life insurance, your provider may require you to increase your contributions or reduce the sum assured.
You can end a whole of life policy early but the surrender value is likely to be less than the total amount you have paid in premiums.
Single or joint policies
As well as taking out a single life insurance policy there is the option to take out a joint policy that covers two lives, usually on a ‘first death’ basis, although ‘second death’ policies are available for specialist needs. This means that the money is paid out and the policy ends at the first death. Joint policies are usually cheaper than two separate single life policies but it is important to assess whether this is the right option for you. For example, your partner may already have life cover through work, which may mean you only need one policy.
Life insurance and inheritance tax
Used correctly, life insurance can help to provide extra funds to pay inheritance tax on your death. By holding your life insurance policy in trust, pay-outs will not be classed as part of your estate and can be used to pay all or part of your inheritance tax bill.
How much life insurance cover do you need?
Deciding how much cover you need is important. Elements to consider include:
- Your current level of debt, including mortgages, credit cards and personal loans
- Expenses you would like covered, including monthly outgoings, school fees, university fees or funeral costs
- Whether you already have cover through your employer.
Once you know this, you can calculate how much insurance you need to cover all expenses and debts. It is also worth considering the potential impact of inflation over time.
An alternative way to decide how much cover to take out is to multiply your current annual income by 20.
Other types of insurance
Critical illness insurance and income protection insurance should not be confused with life insurance. Life insurance covers you when you die. Critical illness insurance, however, will pay out if you’re diagnosed with a serious illness covered by your policy and income protection insurance will pay if you are unable to work due to serious illness or injury.
Deciding on the right life insurance policy for you and your family can be complicated and there are many factors to consider. We can help you to make a decision based on your specific circumstances and needs. Please contact us to find out more.