Life insurance

Helping dependants to cope financially in the event of your premature death

It may be the case that not everyone needs life insurance (also known as ‘life cover’ and ‘death cover’). But if your children, partner or other relatives depend on your income to cover the mortgage or other living expenses, then the answer is yes – you probably do want life insurance, since it will help provide for your family in the event of your death.

Life insurance can make sure they’re taken care of financially if you die. So whether you’re looking to provide a financial safety net for your loved ones, moving house or a first-time buyer looking to arrange your mortgage life insurance – or simply wanting to add some cover to what you’ve already got – you’ll want to make sure you choose the right type of cover. That’s why obtaining the right advice and knowing which products to choose – including the most suitable sum assured, premium, terms and payment provisions – is essential.

Coping financially
Life insurance helps your dependants to cope financially in the event of your premature death. When you take out life insurance, you set the amount you want the policy to pay out should you die – this is called the ‘sum assured’. Even if you consider that currently you have sufficient life assurance, you’ll probably need more later on if your circumstances change. If you don’t update your policy as key events happen throughout your life, you may risk being seriously under-insured.

Own personal circumstances
As you reach different stages in your life, the need for protection will inevitably change. How much life insurance you need really depends on your circumstances, for example, whether you’ve got a mortgage, you’re single or have children. Before you compare life insurance, it’s worth bearing in mind that the amount of cover you need will very much depend on your own personal circumstances, such as the needs of your family and dependants.

There is no one-size-fits-all solution, and the amount of cover – as well as how long it lasts for – will vary from person to person.

These are some events when you should consider
reviewing your life insurance requirements:

Buying your first home with a partner
Covering loans
Getting married or entering into a registered civil partnership
Starting a family
Becoming a stay-at-home parent
Having more children
Moving to a bigger property
Salary increases
Changing your job
Reaching retirement
Relying on someone else to support you
Personal guarantee for business loans

Individual lifestyle factors
The price you pay for a life insurance policy depends on a number of things. These include the amount of money you want to cover and the length of the policy, but also your age, your health, your lifestyle and whether you smoke.

Household to household
If you have a spouse, partner or children, you should have sufficient protection to pay off your mortgage and any other liabilities. After that, you may need life insurance to replace at least some of your income. How much money a family needs will vary from household to household, so, ultimately, it’s up to you to decide how much money you would like to leave your family that would enable them to maintain their current standard of living.

Two basic types
There are two basic types of life insurance, ‘term life’ and ‘whole-of-life’, but within those categories there are different variations. The cheapest, simplest form of life insurance is term life insurance. It is straightforward protection: there is no investment element, and it pays out a lump sum if you die within a specified period. There are several types of term insurance.

The other type of protection available is a whole-of-life insurance policy, designed to provide you with cover throughout your entire lifetime. The policy only pays out once the policyholder dies, providing the policyholder’s dependants with a lump sum, usually tax-free.

Depending on the individual policy, policyholders may have to continue contributing right up until they die, or they may be able to stop paying in once they reach a stated age, even though the cover continues until they die.

Tax matters
Although the proceeds from a life insurance policy are tax-free, they could form part of your estate and become liable to Inheritance Tax. The simple way to avoid Inheritance Tax on the proceeds is to place your policy into an appropriate trust, which enables any payout to be made directly to your dependants. Certain kinds of appropriate trust allow you to control what happens to your payout after death, and this could speed up a payment. However, they cannot be used for life insurance policies that are assigned to (earmarked for) your mortgage lender.

Remove the burden
Generally speaking, the amount of life insurance you may need should provide a lump sum that is sufficient to remove the burden of any debts and, ideally, leave enough over to invest in order to provide an income to
support your dependants for the required period of time.

The first consideration is to clarify
what you want the life insurance to protect. If you simply want to cover your mortgage, then an amount equal to the outstanding mortgage debt can achieve that.

To prevent your family from being financially disadvantaged by your premature death, and to provide enough financial support to maintain their current lifestyle, there are a few more variables you should consider:

What are your family expenses, and how would they change if you died?

How much would the family expenditure increase on requirements such as childcare if you were to die?

How much would your family income drop if you were to die?

How much cover do you receive from your employer or company pension scheme, and for how long?

What existing policies do you have already, and how far do they go to meeting your needs?

How long would your existing savings last?

What state benefits are there that could provide extra support to meet your family’s needs?

How would the return of inflation to the economy affect the amount of your cover over time?