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Bethany Garner
In the bustle of everyday living, life insurance might not be at the front of your mind. But it’s important to consider how your loved ones would manage if you were no longer around.
Taking out a life insurance policy is an effective way to make sure they are financially taken care of when you’re gone.
These policies pay out a lump sum or monthly income in the event of your death, which can be used to cover funeral costs, pay off mortgages, and replace the income you’d otherwise provide.
Life insurance can offer valuable reassurance to people in many different circumstances.
Although it’s often associated with parents, there are many reasons to consider life insurance even if you don’t have children.
If your spouse or partner depends on you — financially or otherwise — taking out life insurance will ensure they receive support should something happen to you. It’s also a good idea to factor unpaid labor, such as childcare or housework, into the equation. If you take care of the home, a life insurance policy ensures your partner can pay for someone else to take on those tasks if you were gone.
Even if you both contribute to shared living expenses you may wish to take out a policy. This ensures the surviving partner can maintain their current lifestyle, giving them some breathing room to adjust.
Whether you care for underage children, an elderly relative, or a close friend, taking out life insurance could be a good investment.
Although nothing can replace a loved one, a life insurance payout will help financially support your dependents if something were to happen to you.
If you’re paying off a mortgage, a life insurance policy ensures the remainder of the debt will be cleared if you pass away during the repayment term.
Some mortgage providers may also factor in your life insurance policy when deciding whether to lend to you.
If you are the owner or partner of a business, it’s a good idea to consider a life insurance policy that protects your company’s financial future should anything happen to you, your partner, or an employee.
There are several types of life insurance designed specifically for businesses. They aim to help surviving owners and other key stakeholders buy out shares, settle debts, or continue to run the business if the policyholder passes away or becomes terminally ill.
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Tailor cover to suit your needs and gain financial security for your loved ones
There are some circumstances under which you may not need life insurance:
Some employers offer death in service cover — a form of insurance that pays out to your chosen beneficiary if you pass away while on the company’s payroll.
If you have death in service cover, you may not need life insurance. However, if the policy’s payout does not offer your desired level of cover, you can take out a separate life insurance policy too.
Most deaths in service policies pay out about four times your annual income. This sum should be taken into consideration when calculating whether you need additional life insurance coverage.
If no one depends on you financially and you don’t have a mortgage, you may choose to forego life insurance.
However, if you plan to buy a home or have children in the future it may make sense to buy a policy right away since premiums tend to be cheaper the younger you are.
Taking out a life insurance policy will not impact any means-tested benefits you receive.
Receiving a pay-out could, however. Once the policyholder’s debts have been paid off, any money leftover will count as ‘savings,’ which will be used to help calculate what benefits you receive.
With Universal Credit, for instance, having savings over £6,000 will reduce your monthly payment.
The younger you are, the lower your premium is likely to be. If you plan to buy a life insurance policy at some point, it’s best to choose one sooner rather than later.
Premiums tend to be their lowest for healthy adults in their 20s and 30s.
The level of cover you need depends on your circumstances.
As you work out the level of cover you need, you may wish to consider:
Your pay-out should ideally be enough to support your children, and anyone else who depends on you financially, until they can become independent.
If you have large debts such as a mortgage, consider a policy that will clear them should you pass away. This ensures any remaining debt won’t fall on your loved ones.
Planning a funeral can be taxing enough without having to worry about money. Factoring the cost into your level of life insurance coverage could ease this burden for your loved ones.
If a partner or family member relies on you for income, you can factor this into your decision.
When it comes to choosing a life insurance policy, you have several options to consider.
Your choice will depend on individual circumstances such as whether you have dependents or debts, and the monthly premium you can pay.
Term insurance
Term insurance policies pay out a lump sum of your choice should you pass away during a pre-specified period — known as the policy’s ‘term’.
Once the term is over, you are no longer covered and need to take out a new policy.
Certain ‘renewable’ policies allow you to extend your cover part-way through the term but may come with a higher premium.
When selecting a term insurance policy, there are different options to choose from.
Joint life insurance
A joint life insurance policy could be worth considering if you are raising children together with a partner or spouse. Because it covers you both but charges a single premium, it can be a more cost-effective option than two individual policies.
Although you and your partner are both covered it will only pay out once when the first person passes away. At this point, the survivor is no longer covered.
Critical illness cover
Critical illness cover pays out if you are diagnosed with a critical illness specified by your provider at any point during the policy term.
Many life insurance providers allow you to add this cover to your policy.
If you do choose to add critical illness cover, check the terms carefully. Some policies pay out only once — for either death or critical illness. If you become ill and make a claim the policy will end, leaving you without cover.
In these cases, you may be offered a like-for-like policy with the same provider for a lower premium than you would find elsewhere.
Other policies pay out twice — once should you become critically ill, and again if you pass away during the term.
If you are a parent or primary caregiver, adding critical illness cover to your life insurance policy could be a good idea. The pay-out you receive will help cover the cost of alternative care if you temporarily become too unwell to carry on as usual.
Terminal illness cover
Terminal illness cover pays out if you are diagnosed with a terminal illness and are unlikely to survive for more than 12 months.
The pay-out ensures the policyholder can make plans to take care of any dependents and settle their affairs.
Terminal illness cover is sometimes included in life insurance policies as standard. If a terminal illness claim is paid, the policy comes to an end. There will be no additional payout when the policyholder passes away.
The whole of life cover
The whole of life policies covers you for the remainder of your life, so long as you keep up with premium payments. They are guaranteed to pay out a lump sum whenever you die.
This type of cover usually comes with a higher premium than fixed-term policies, and the premium could go up over time.
The whole-of-life policies sometimes include an investment element, with a portion of your premium payments set aside in an investment fund. If the fund performs well, the payout your beneficiaries receive will increase. However, if the fund performs poorly, your premium may rise.
You can sometimes withdraw the investment during your lifetime, or use it as collateral against new borrowing.
When you pass away, your debts — including any mortgages, credit card debt, or personal loans — are passed onto your ‘estate’.
Your estate is made up of everything you owned, such as cash, property, shares, personal possessions including vehicles and jewelry, or money paid out on a life insurance policy.
The executor of your estate — the person you select to wrap up your affairs after you pass away — is responsible for ensuring that any debts are paid off. This may involve selling property or personal possessions to raise the necessary funds or using savings or a life insurance pay-out.
Joint debts are treated differently. If you took out credit jointly with someone else, they become liable for the remaining balance after you pass away.
If you have a joint mortgage with your spouse or partner, the remainder of the debt — along with your share of equity in the property — is passed to them.
Any debt you have with the Student Loan Company (SLC) is canceled.
To ensure you are getting the right level of cover at the best possible price, it’s a good idea to compare quotes from a range of life insurance providers.
When requesting quotes, be completely honest about your circumstances. If your provider finds out you have stretched the truth to get a lower premium, they are less likely to pay out.
Once you have a policy in place, it’s worth reviewing your level of coverage regularly. If your circumstances change — for instance, if you move home, pay off your mortgage, or have another child — the amount of cover you need could change too.
Whatever policy you choose, it’s a good idea to write it in trust — most providers will offer to write it in trust for you, and if they don’t you can usually request it at no extra cost.
When a policy is written in trust it is not included in your estate, which means the pay-out is shielded from inheritance tax.
You’ll need to choose a trusted person or people to be your ‘trustees,’ responsible for dividing the assets you leave behind between your chosen beneficiaries. Your trustee and beneficiary can be the same person.
Remember that once a life insurance policy is written in trust, you can’t change your beneficiaries.
Is life insurance needed after the age of 60?
Later in life, you’re more likely to have independent children and to have paid off your mortgage.
That said, you can still take out a life insurance policy in your 60s, and there are a few reasons you may wish to do so:
What happens if you don’t have a life insurance policy?
If you don’t have a life insurance policy in place when you die, your estate will be passed on according to your Will if you have one, or your nearest kin if you don’t.
The value of your estate will be used to cover any debts in your names, such as a personal loan or mortgage.
If the remaining estate is worth more than £325,000 (or £500,000 if you leave a home to your children or grandchildren), your beneficiaries will need to pay an inheritance tax of 40% on anything above this value.
What are the alternatives to life insurance?
If you don’t qualify for life insurance because of a pre-existing health condition, or can’t afford the monthly premium, there are a few alternatives to consider that could help you financially support your loved ones.
Can I cash out my life insurance policy?
If you have a term life insurance policy, you cannot cash it out.
If you have a whole-of-life policy that builds cash value, you can often withdraw some or all of your funds during your lifetime.
What happens if you outlive your life insurance term?
If you outlive the term of your life insurance policy, you will no longer be covered. You can take out a new policy with the same provider, or shop around to see if you can find a better deal.
Bear in mind that, as you will be older, your new premium is likely to be more expensive.
