A financial lifeline
Although it’s hopefully something you won’t need for many years, it’s a good idea to organise your life insurance sooner rather than later. Here’s what you need to know
It’s completely normal to have concerns about what will happen to your loved ones after you’ve passed away, especially when it comes to finances, and if you’re the main earner in the family you might worry about where they will get their income. However, that’s where life insurance comes in; this is essentially an insurance policy that is designed to pay out either a lump sum or regular instalments of money to your dependents in the event of your death. It therefore guarantees your family some kind of financial security, and it can be used to cover things like mortgage repayments and funeral expenses.
However, it’s important to note that life insurance is more necessary for some people over others – if you are a single person with no children or any other dependents, life insurance is not so crucial. However, if you have a spouse and children or a mortgage to pay off, then it is usually well worth taking out a life insurance policy to cover your financial commitments. ‘Life insurance purchases are usually triggered by important life milestones,’ explains
Tom Vaughan, head of life insurance at Confused.com.
‘For example, when starting a family, someone might look to cover the mortgage and living costs in order to look after their children if a worst-case scenario happened.’
The next step is to decide on the type of life insurance policy that you want: the two main types are a ‘term’ policy or a ‘whole of life’ policy. The former covers you for a fixed period of time only, such as for 15, 20 or 25 years, and you can choose from either a level term, a decreasing term or an increasing term policy. If you pass away during this period the insurance will pay out to your beneficiaries, but if you die once the term has finished they will not receive a payout. Alternatively a whole of life policy – sometimes known as ‘life assurance’ – will pay out a sum of money to your dependents no matter when you die, but there is usually a higher premium, or you could choose a specific ‘over 50s’ policy instead. ‘Whole of life policies are underwritten and offer higher pay out, whereas over 50s policies are not underwritten and offer smaller pay out sums,’ Tom adds. It is also possible to opt for family income benefit insurance, which pays the money out to your beneficiaries in regular instalments rather than as a lump sum, and if you’re married you might choose a joint policy, which is often a cost effective option.
When it comes to how much you should be expecting to pay each month it can vary hugely, but generally it will come down to just a few pence a day. ‘According to Confused. com data, the average cost of life insurance so far this year is £23.52,’ Tom says. ‘However, life insurance cover can be bought for as little as £4 a month and can extend far beyond that depending on how much you want to cover.’ Various different factors will have an impact on your premium, such as your lifestyle and physical health; your age will also play a significant role in deciding how much you pay, so it therefore makes sense to take out a life insurance policy when you’re younger. It is important to be aware, though, that most life insurance policies will not cover you if a serious illness prevents you from working. ‘However, there is often the option to purchase add on “critical illness cover”,’ suggests Tom. ‘This would cover the loss in earnings in the case of illness.’
Choosing a life insurance policy can seem like a daunting prospect, but there is plenty of advice out there: websites such as Which? and The Money Advice Service provide lots of information, and Confused. com have also created a range of guides to help people decide what is the most suitable option for them. A financial advisor will be able to help too – but before committing to a policy, be sure to do your research.