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Esther ShawContributor
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How would your family or partner manage if your income suddenly stopped in its tracks? Life insurance is a type of protection designed to help your loved ones cover mortgages, debts, and day-to-day expenses when you are no longer around.
With this type of insurance, you pay a regular monthly or annual premium to a life insurance company. If you die during the term of the policy, a lump sum is paid out to your family – or other dependents – known as ‘beneficiaries’.
While the beneficiaries can do what they like with the funds paid out, the money is commonly used to clear the mortgage and other outstanding debts, as well as to cover household bills, living costs – and to fund childcare.
Given that none of us knows what’s around the corner, it’s very important to have financial protection in place. And, of course, COVID-19 has been a timely reminder of this.
Simply put, life insurance offers peace of mind that your family would be financially protected if you were no longer around to provide for them. Without this safety net in place, they may struggle to keep financially afloat, causing even further anguish and upheaval.
Certain key life events trigger the need for life insurance, such as buying a house, getting married, or having a baby. You should then think about increasing your level of cover when things change – for example, you have more children or take on a bigger mortgage if you’ve upsized your home.
While a greater level of cover is likely to result in a higher premium, this is likely to pale into insignificance for the peace of mind it offers – and, of course, what it might one day provide.
As a minimum, you should opt for enough coverage to pay your debts – including what’s outstanding on the mortgage, credit cards, and loans – pay the bills, keep your car, and maintain your current standard of living.
However, some experts say that around 10 times your gross annual salary should be a starting point, rising to 15 or even 20 times if you have large commitments. Needs calculator
Competition among life insurance companies, as well as simplicity of the outcome (alive or dead), means premiums are relatively cheap – literally starting from as little as £5 a month.
The exact premium you are quoted, however, will depend on a range of factors, including your age, health, and lifestyle (such as if you exercise and whether you smoke). It will also hinge on the amount of cover you want (known as the ‘sum assured’), and the length of the term you want the cover for.
You can expect to pay lower premiums if you take out life insurance when you are young and healthy, while premiums will gradually increase as you get older.
Premiums tend to be higher also if you suffer from a health condition that could mean you are more likely to die sooner than the projected average age.
There are various kinds of life insurance available and the one you choose will depend on your circumstances. Here’s an outline of how each one works.
In broad terms, the most common form of life insurance, ‘term insurance’ is the cheapest option as it only pays if you die within the specified term of the policy.
This is opposed to the ‘whole-of-life’ cover (more details on this below) which pays out whenever you die.
Term life insurance falls into three different types: decreasing term, level term, and increasing term. Here’s an outline of each.
A level term policy pays out a fixed amount if the policyholder passes away within a pre-selected period of time – known as the policy ‘term’. No matter how many years into the policy you pass away, your beneficiaries will receive the same payout – known as the ‘sum assured’.
This makes level term cover well-suited to an interest-only mortgage, where only the interest is paid off but the capital debt does not decrease. While premiums remain the same during the term, they tend to be more expensive to those attached to decreasing term cover.
If you survive the ‘term,’ your cover will end, and you will need to purchase a new life insurance policy.
Unlike term insurance (which only pays out if you die within a specified period), a whole-of-life policy is designed to run for the remainder of your life.
So, provided you keep paying your monthly or annual premiums, your loved ones are guaranteed to receive a payment when you die.
For this reason – and because the whole-of-life cover does not require a medical exam or take into account your pre-existing medical conditions – premiums for whole-of-life insurance tend to be more expensive than term insurance.
Furthermore, as this type of policy is typically linked to a specific investment, your premiums may also increase if that investment does not perform well.
Usually, you will need to pay premiums for the rest of your life, although there are some types of whole-of-life cover (such as over-50s) that allow you to stop paying, still be covered once you reach a certain age, 90 for example.
Payouts for whole-of-life cover are often used to offset any inheritance tax bill that your loved ones may receive in the event of your death.
A joint life insurance policy covers two people, usually who are married or in a civil partnership. (It’s possible to buy joint life insurance just as a couple, although some insurers may stipulate you must live in the same household.)
Joint life insurance means you pay just one premium which will provide cover for you both. However, the policy only pays out once – on the first person to die within the term.
Before taking a joint policy, it’s worth checking whether two single policies could be better. While it means two sets of premiums, it also means two potential payouts.
The older you get, the harder it can be to find affordable life insurance. This is where ‘over-50s life insurance’ can come into play.
As it says on the tin, this cover is designed specifically for those aged over 50. Applicants are not underwritten and are therefore guaranteed to be accepted, irrespective of their current health or lifestyle. This can make this type of policy popular.
Premiums are usually fixed for the duration of the policy, and offer guaranteed payouts, so long as you keep up with all payments.
This type of life insurance – also known as ‘decreasing term insurance’ – pays out if you pass away before you have paid off your mortgage. As this cover is tied to your mortgage, the amount covered decreases as you continue to pay it off.
Note that if you bought this cover from your lender when you took out your mortgage, you could be paying over the odds, so it could pay to switch (ensuring, of course, you leave no gaps in cover).
Many life insurance policies allow you to add on critical illness cover for an additional cost. It pays out a tax-free lump sum if you are diagnosed with a specific illness or medical condition listed on your policy – such as cancer, heart attack, stroke, or loss of limb – during the term.
Its purpose is to offer a financial buffer at a highly stressful time of life, and support if you have to stop working. The funds paid out can be used to ensure your mortgage and other major financial commitments are paid. The money can also be used to make any required adjustments to your home that make life more comfortable.
Critical illness cover is considerably more expensive than life insurance. So, while you should look to take out enough cover for your mortgage, debts, and monthly bills, in reality, it may be a case of seeing how much you can afford.
Also be sure to read the small print carefully, as insurance companies have a finite list of conditions they will cover. This can run to more than 100, but if your illness isn’t included, you won’t get a payout.
You may also be declined if you have withheld information about your medical history or if the illness you contract isn’t advanced enough.
