Life insurance, known also as term assurance, is insurance against your life. If you have people to think about after you’ve passed on from the world, such as a partner, children or even pets that may outlive you, you’ll want to ensure they are cared for financially.
If you are debt free (such as from a mortgage, credit cards and loans) and single with no dependents, then life insurance is probably unnecessary. If your debts are likely to remain beyond your death, your next of kin will be responsible for paying them off, as well as for your funeral which can cost at least £1000. In this instance, life insurance is definitely advisable, because debts are inherited.
Types of Life Insurance
If you have a mortgage, you’ll probably already have life insurance as this is often a requirement of the loan. It ensures that the mortgage will be paid if you die and your cover will match the amount and the length of your mortgage term. But protecting a mortgage isn’t the only reason to buy life insurance. You have the choice of three types of life insurance:
- level
- decreasing
- renewable
All are charged in different ways.
Level Term Assurance means that the premium and sum covered stays the same, so they are ideal for interest-only mortgage cover or for leaving behind a lump sum for your relatives.
Decreasing Term Assurance will reduce year on year following the term of a repayment mortgage – as the sum you are insuring is going down.
Renewable Term Assurance offers insurance for an agreed period of time, usually between five and ten years. The insured amounts are quite large and the premiums are usually quite low for the first policy you take out. There is an option to renew at the end of the term but expect the premiums to rise dramatically.
If you intend to leave a lump sum to your relatives when you die, consider how much income they would need to maintain the same standard of living if you were still alive. As a guide, multiply your annual earnings by the number of years that you think they will need to be financially supported and that’s probably the amount you need to insure for. If you are married, or are in a long-term or civil partnership, you probably share the cost of the mortgage and household expenditure. Therefore you’ll both need enough life insurance to cover each other’s contribution.
Children require a lot of investment – a 2006 survey exposed the costs of bringing up a child at almost £123,000 over a period of 18 years. This runs far higher if they go on to study at university. If one parent’s income is lost, there’s a massive shortfall. Furthermore, the cost of replacing the parent who runs the home and manages the care of the children is far greater than you might think. It is estimated that the equivalent salary would be more than £24,000 each year.
Company Life Insurance Policies
Many workers who have a “Death in Service” policy with their employer rely on this as their only form of life insurance. This would normally provide a lump sum of three or four times your salary at the time of death and expires when you leave the employ of that company. However, it may not be enough to cover your mortgage and your other outstanding debts, nor would it likely be adequate cover to meet the household expenses and care of your children.
If someone else supports you financially or provides care for you, such as your children in your later years, it would be advisable to take out a life insurance policy on their life. It is acceptable to insure someone other than yourself as long as there is evidence of ‘insurable interest’; you will need to prove to the insurance provider that their death will impact on your financial wellbeing.
Life Insurance with Critical Illness Cover
If you are a key member of a family, it may be advisable to take out critical illness cover within your life insurance policy. A serious illness, such as cancer or a heart attack, or permanent disability may affect the ability to earn again and lead a normal life beyond contracting the illness. This cover is designed to ease the financial pressures by paying out a tax-free lump sum. It is standard practice. It is standard practice for the insurance company to wait one month after you have become ill before they pay out on the policy.
As with most insurance types, you’ll find there are more discounts exclusive to online applications. Your premiums will be determined by your age, sex, occupation, health and smoking habits, and the type of cover you are buying.