If you have dependent children, academic research undertaken only a few years ago may provide a sobering thought. It suggested that almost one in 20 children (4.7%) experience the death of a parent before they reach the age of 16.
The loss of a parent throws many obstacles in the way of that youngster’s life, of course, but if the parent was also a breadwinner, an immediate impact is likely to be the sudden loss of family income. Life insurance is designed to guard against those difficulties by at least softening the blow.
Little wonder, therefore, that the Money Advice Service suggests that if members of your family depend in any way on your income, you are likely to need life insurance.
But it isn’t just about the financial implications of losing the major breadwinner’s income, what would happen if a stay-at-home parent died suddenly? There will be costs involved in looking after the children, running the home etc., which will need to be covered.
That is why life insurance exists, to provide a tax-free cash sum when you die. It may be used to keep your loved ones financially secure, whether that be for clearing the mortgage or other debts, or leaving a legacy for your children (such as to cover university costs or to help them buy their first home).
But which life insurance is the most appropriate for you? Here are our top 8 tips for helping you reach that decision.
1. Compare life insurance
Since it takes many different forms, it is essential to compare life insurance policies carefully. Not only can the premiums vary but the terms, conditions and benefits too.
Life insurance options may include:
Level term life insurance
Level term life insurance is probably the simplest and most widely purchased form of life insurance - it guarantees a fixed lump sum cash benefit if you die at any point during the agreed term (as long as the premiums are kept up to date).
Other types of life insurance
- if you are looking for cheap life insurance, you might consider decreasing term life insurance, where the assured benefit steadily increases as the term progresses – so premiums are generally cheaper;
- a particular variant may be mortgage protection insurance, where the assured sum decreases in line with the steadily reducing outstanding balance of a standard repayment mortgage;
- neither is to be confused with whole of life insurance – or life assurance – which pays out a cash benefit when you die as long as you have paid the premiums up to date (there is no fixed term);
- over 50s life cover may offer a cheap life insurance solution if you have a pre-existing medical condition or have been refused life cover elsewhere – it offers guaranteed acceptance no matter what your lifestyle choices or medical history. Premiums can start from as low as £3.70 a month. Do note, however, that the sum insured (the pay out amount) may typically be lower (for example £10,000-£15,000) compared to other types of life insurance.
2. How much life insurance?
When you compare life insurance options, remember that the best life insurance provides protection that is appropriate to your particular, individual needs and circumstances – no one size fits all. What is the best life insurance for you may be completely different to that of someone else.
A widely-used rule of thumb to use as your starting point is to have approximately ten times the annual earnings of the family breadwinner in life insurance. But, it depends on what the life insurance is designed to – clear a mortgage debt if you die prematurely? Or are you already mortgage-free and want to leave a sum to cover the everyday costs for those left behind?
3. How long a term?
The same rules as above apply regarding your personal circumstances, but the term (i.e. the length or period of the insurance) is likely to be useful up to the date that your major commitments have ceased – once the children have finished full-time education, for example, or until your mortgage has been repaid.
4. Consider the pros and cons of joint life cover
When you compare life insurance, consider the pros and cons of one term life policy to cover both you and your partner versus two individual policies.
A joint life insurance policy pays out if either of you dies within the term – but pays out once only.
Separate life insurance policies for both you and your partner ensure that your dependants receive the cash benefits when each of you dies, and it may not be as expensive as you think.
And if you subsequently separate or divorce, the individual policies remain in place. This means you will not need to arrange new ones - useful when your more advanced years may make premiums more expensive.
5. Do you have dependants?
Some might argue that you don’t need life insurance if you don’t have anyone dependent on your income.
But the pay out when you die might be used to ensure your funeral expenses are covered and outstanding debts otherwise payable from your estate are taken care of – so providing a more valuable legacy for whoever you leave your estate to.
6. Health, age and lifestyle
Your state of health, age and lifestyle / occupation choices (whether you smoke, for example, have a dangerous job or indulge in dangerous hobbies) are all factors determining the cost of the premiums you need to pay.
If you already have life insurance and your circumstances change, don’t forget to tell your insurer. For example, if you have given up smoking for at least a year, then this may be reflected in the cost of your life insurance cover with slightly cheaper premiums.
Or, if you have given up abseiling as a hobby, again, let your insurer know to see if the cost of your premiums may reduce. Or shop around and compare life insurance policies elsewhere – you may get a more attractive deal.
7. Fixed or variable premiums?
If you are on the lookout for cheap life insurance, you might be tempted by policies with variable premiums, since they typically start out at a lower price.
Do note, however, a variable premium rate might be increased by the insurer, to the extent that a fixed price premium for the entire life insurance term may have offered the most cost-attractive option.
8. Life insurance in Trust
In order to maximise the pay out benefits, you may wish to consider putting your life insurance into Trust.
Usually, your life insurance policy is the property of your estate when you die. If you write the policy into Trust, however, this means it is not part of your estate (it is the Trust’s), so you may avoid inheritance tax liabilities on the amount of the death benefit and your beneficiaries may receive the pay out more speedily.
Finally … buying the most appropriate life cover is very important – get it wrong, and it may leave your loved ones in a difficult financial position when you die. We hope these 8 tips and suggestions have gone some way to helping you make an informed decision when choosing the life insurance most likely to suit your personal needs, requirements and circumstances.
We don't want, but we do need it