Life insurance (or life assurance as it’s sometimes also called) is one of the lengthiest financial commitments most of us make.
But choosing the right life insurance policy can be confusing. And that’s even before you’ve received the lengthy application forms you have to fill in.
First, the good news. Getting a life insurance policy is one of the cheapest ways of making sure you care for your family or loved ones if the worst were to happen to you.
Now, the not-such-good news. You do have to think about it. The Childhood Bereavement Network’s figures show that by the age of 16, one in 20 children will have lost one or both of their parents.
So in this guide, we’ll explain how life insurance works. And tell you the questions to ask to get the right life insurance for your needs.
Types of life insurance
There are various kinds of life insurance. Some protect a mortgage.
Some protect your dependents. Others can provide a way to reduce your inheritance tax burden.
Here, though, we’ll look at the sort most people need. That’s life insurance to provide for your family if you or your partner were to die.
- Do you need life insurance?
If not, consider taking out a life insurance policy while you’re younger. It’ll cost far less than if you apply for one when you’re older.
You’ve got dependents. You’ve a family, partner or relatives who depend on you? You pay the mortgage or take care of living expenses?
Then the answer is yes. Having life insurance means they'll be looked after in the event of the unthinkable. You’ll also have the reassurance that they won’t struggle to pay the bills on top of dealing with grief.
- What kind of life insurance policy do you need?
Level term insurance pays out a set sum, say £500,000, when you die during the fixed term you set. This lump sum won’t change. So you and your dependents know it will be there for them.
You can also arrange instead to make the pay-out a monthly sum you decide is right to meet their living expenses etc. In this case, it’s described as a family income benefit policy.
In both cases, the money gets paid out whether you die one year into a say 20-year term or at any point up to the end of the 20-year term.
If you don’t die within the term, you don’t get any of the money you’ve paid back. In other words, there’s no cash-in value.
- How do I decide what figure to insure myself for?
It’s often a good idea to talk to a life assurance advisor to help you work all this out.
Best advice from Martin Lewis of moneysavingexpert.com? “Roughly cover 10 x the annual income of the highest earner till kids have finished full-time education.”
But it’s good to factor in covering the following too:
- Any outstanding debts. This includes your mortgage if you don't already have a separate policy in place.
- Immediate outgoings your dependents would need to pay.
- Future planned large outlays, such as school and university fees, or wedding costs for your children
- Funeral costs
- How long do I need life insurance for?
Most people with children insure themselves until when they think they’ll no longer be reliant upon them. So think: when will my kids be able to stand on their own two feet?
You could time your life insurance term to end on completion of full-time education, or a few years later.
If it’s a partner you want to keep supported, then it should be at least until you reach pensionable age. That’s assuming you’re in line for a reasonable pension. Otherwise, fix the term accordingly.
- I'm married so should I be looking at a joint life insurance policy?
But, statistics show that up to 42% of marriages end up in divorce. So you might feel safer with two single policies from the outset. Later on, if you had to cancel the joint policy and buy two single policies, based on your new age and health, it would be more expensive.
- How does my state of health affect the life insurance policy price?
Be 100% honest in your application or an insurer can use non-disclosure as a reason not to meet a claim. Many providers ask you to go through a medical examination before acceptance.
If you’ve a pre-existing medical condition, it's particularly worth speaking to a broker. They'll know which insurers will give you the best rates.
- Will my life insurance payout be liable for inheritance tax?
But it’s easy to avoid this by writing the policy ‘in trust’ at the time you take it out. Most insurance companies will include the documentation when you apply to them.
Other types of life insurance policy
These are the basics of life insurance. There are a number of other products, however, you can choose.
- Increasing term life insurance or index-linked term life insurance.
This protects your money against inflation. The sum insured either increases by a fixed amount each year, or follows the Retail Prices Index (RPI) measure of inflation. But your premiums will also rise too.
- Renewable term insurance.
This builds in the option to renew your life cover when the policy term finishes without the need for a health review.
- Terminal illness cover
can be included in your life insurance policy. So the policy will pay out early if you’re not expected to live for more than 12 months.
- Waiver of premiumcover can be included in your policy for a small additional amount. So if you’re unable to work due to illness or injury, your premiums will be paid for you. Usually, this cover only starts when you have been unable to work for at least 26 weeks.
So there’s a lot to think about if you’re to choose the right life insurance. And much as you can’t see into the future, it’s a good idea to think about all possible scenarios when you choose your policy type.
Do you need more information on the life insurance explanations here? Or would you like talk over your circumstances to help you choose the right life insurance product? We'll be happy to help you here.
Below are some of the insurances Mortgage Advice Services can offer you today, do not hesitate to contact us. Our advisors are ready to answer any of your inquiries.