Life insurance provides your loved ones with financial support in the event of your death. However, there are several different types of insurance and knowing which is right for you can prove to be a minefield. This article will help make sense of some of the terminology and go through some of the considerations you need to bear in mind.
To provide financial security for your loved ones after your death, the first consideration is usually your mortgage, especially if you’re the main breadwinner. Without your income, meeting the monthly mortgage payments could prove impossible and result in an unsettling move.
A decreasing-term life insurance policy lasts for a pre-agreed number of years, which usually matches the length of your mortgage, and pays out if you die during that time. Each year, the potential pay-out decreases as it is designed to be used with a repayment mortgage, where the outstanding debt decreases over time. This means that this type of policy is cheaper than a level-term insurance policy.
Pro: Affordable for most
Con: Only covers mortgage balance
Best for: Those with repayment mortgages whose dependants can cover other expenses
If you’d like your family to be mortgage free and have a lump-sum to cover future expenses such as education, holidays or even the basics like food, utility bills and running a car, you should consider a level-term life insurance policy. Like decreasing-term insurance, this lasts for a pre-agreed number of years and will pay out a fixed amount if you die during that time. This will allow for the mortgage to be paid off plus any additional lump sum or simply to cover a fixed amount of debt.
Pro: Knowing what you will receive on pay-out
Con: More expensive than decreasing-life policies
Best for: Those with dependants or those with an interest-only mortgage
For those looking for protection for their loved ones, no matter when they die, a whole-of-life insurance policy may be the way forward. As it says, it covers you for the rest of your life. This type of policy is typically more expensive than those that cover a fixed period of time.
Pro: Pays out to your dependants as long as you maintain the monthly payments
Con: More expensive than shorter term policies
Best for: Generally used to cover a funeral or for inheritance tax planning
You may already have life insurance provided through your employer. These are typically a simple death-in-service policy providing a single pay-out of four times your salary on your death. This means that any additional policy you take out can be reduced and your premium will be lower. Check all your employee benefits and reconsider if these change as you’re promoted etc. before you buy a life insurance policy.
There are also other income protection policies that you might want to consider in addition to life insurance.
For example, the lives of your loved ones would be greatly changed if you became critically ill and left unable to work. It’s possible to add critical illness cover to a life policy at an additional cost, however, combining the two is usually cheaper than having two separate insurance policies.
Critical illness policies provide your family with monthly payments if you contract a critical illness from a specified list of conditions (including heart disease, cancer, Parkinson’s etc.) and are no longer able to work.
It’s worth considering your family’s medical history and assessing the likelihood of contracting one yourself. Statistically speaking, the risk of anyone suffering a critical illness, rather than dying during the length of their mortgage, is much higher so the costs of these policies are greater. You’ll need to weigh up if you think the monthly cost is worth paying to save your family from financial strain in the event of you being diagnosed with a critical illness.
If you don’t have an income, you still have a value within the family. If you’re a stay-at-home parent or a home maker, the work you do has a cost and if you weren’t there to do it, someone would need to be paid to do it. Childcare, cleaning, laundry, gardening, cooking, shopping will all need to continue and be paid for. There are policies available specifically designed with people like you in mind so consider looking into these.
Once you’ve arranged your cover, it’s tempting to file the paperwork away and never think about it again. But as your life changes and adapts, your life insurance should too. If you move to a bigger house and increase your mortgage, if you divorce or have more children, if you change job or become employed again, your life insurance policies will need to change accordingly.
It can feel like a gamble to change your policy, but we can review any policy you already have in place, for free.
The team are available to discuss your requirements and to help you find the best solution.
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