Life insurance could prove to be the most important financial product you ever buy.
If you die while you still have dependents, being able to claim on a life insurance policy could mean the difference between your loved ones struggling to make ends meet, and their being financially secure.
Despite this, many of us simply don’t have any life insurance cover in place – which is sometimes hard to fathom when you think of how vulnerable we all are to accidents and serious ill-health.
But it’s also not hard to see why so many of us put it off. After all, most of us have enough money worries in our everyday lives without also having to think about what will happen in the event of our death.
And who wants to think about death anyway!
However, if you don’t consider what your dependents would do without your income, you could end up leaving them high and dry financially at what is already likely to be a very stressful and emotional time.
Even if you don’t work – you might be a stay-at-home parent, for example – the cover could still prove invaluable, as the chances are childcare and other housekeeping costs would need to be paid for if you were no longer around.
There are several different kinds of life insurance policy to choose from, so it’s important to understand exactly what’s available before buying. Here we explain how the various kinds of plan work, so you can decide which policy might be right for you.
Term Assurance pays out when the policyholder dies within a set period of time. Most policies run for between 10 or 35 years, but you specify how long you want the term to be.
If you die during the term, the policy will pay out the amount agreed at the start, which is known as the ‘sum assured.’ Some policies will also pay out if you are diagnosed with a terminal illness.
If you live beyond the term of the policy, the cover simply terminates – there is no investment element or any return of premiums.
Variations on the term insurance theme
There are two main kinds of term insurance policy.
With level term assurance, the amount of cover – the ‘sum assured’ – is the same in the final year of your policy as it is in the first.
If you have decreasing term assurance, the potential pay-out will reduce over the term.
This sort of cover is often taken out by people to back a repayment mortgage, with the sum assured shrinking along with the outstanding mortgage debt. The cost is less than for level term cover.
How long will I need life cover for?
When working out how long you need life cover for, there are several factors to take into consideration.
First, you should think about any debts you have, such as your mortgage, credit card and any personal loans. These will need to be paid off when you die, so look at your current repayment terms.
For example, if you have a mortgage and it has 18 years left to run, you may want to only take out cover for this 18-year period, so you can be certain that it will be paid off when you die.
Alternatively, you might want to take out cover for longer than this, so that you leave a lump sum when you die once your mortgage is paid off.
It’s also vital to think about how any dependents will be provided for if you are no longer there. If you have young children, for example, it’s a good idea to take out cover that will last until they become financially independent.
How much cover do I need?
When deciding how much life cover you need, you will need to add up any debts that need repaying, as well as how much your partner and any children would need to maintain their lifestyle each year if you died.
Once you’ve established what sort of financial support they would need if you were no longer there, you should look at whether you already have any life cover in place.
Many employers include what is known as ‘death in service’ benefit, which will pay out a lump sum if you die. Typically this is worth around four times’ your salary, but it’s worth checking your contract so you know exactly how much cover you have in place.
If you have limited debts, or few dependents, this may provide you with enough cover, but if not, you may want to supplement it with further cover.
Bear in mind, too, that if you change jobs, your new employer may not offer the same level of cover, so you may prefer to arrange your own life policy so that you have continuous protection in place.
Remember that the older you are when you take out cover, the more expensive it will be, so don’t leave sorting out cover until later on in life, when premiums could be unaffordable for the amount of cover you require.
What does life insurance cost?
The price of life insurance has fallen considerably over the past few years, so premiums shouldn’t break the bank.
If you have a policy which you took out several years ago, you might be able to find cover at a cheaper price, even though you are now older. It’s certainly worth running a comparison quote to see if a better deal is available.
Don’t, however, cancel your existing policy until you’ve definitely got other cover in place.
Previously, women could expect to pay lower premiums than men for life cover, as they have a longer life expectancy. However, under European legislation, introduced in December 2012, insurers can no longer take gender into account when determining premiums, so this differential between women and men has disappeared.
Although your gender will no longer have a bearing on your premium, several other factors will influence how much you will have to pay.
Insurers will look at your age, health and occupation. For example, if your work is very physical or dangerous, premiums will be higher than if you sit behind a desk all day.
Similarly, if you have always been in the peak of health, your premiums will be much lower than if you have suffered from a serious medical condition at any point, as your life expectancy will be considered longer.
You will also pay less for cover if you are a non-smoker. However, don’t assume you can kick the habit and then take out cover as a non-smoker. You will need to have given up nicotine products, including e-cigarettes, for at least 12 months, and not be using any nicotine replacement products to qualify as a non-smoker.
If you already have life cover in place and stop smoking, let your insurer know, as they might be able to reduce your premiums.
Joint or single life cover – which is better?
It’s natural for couples to think it’s better to take out a joint policy, but this might not be the case.
For a start, a joint policy is not significantly cheaper than two separate single life policies. But more importantly, a joint policy only pays out once on the first death, leaving the second person without cover.
Since they are likely to be older by this time, it will be more costly for them to buy insurance for themselves at that later date.
By buying two single life policies you have more flexibility – however it will depend on your individual circumstances. You might want to insure yourselves for different amounts, depending on your income, and you may want to buy cover for different lengths of time.
What other types of life insurance are there?
Although term insurance is by far the most popular form of life cover, there are other types of cover which can provide financial protection for your dependents should the worst happen.