When you take out a life insurance policy, you’re relying on the cover to offer solid financial protection to your family, or in the era of declining marriages perhaps your significant others when you die. It could be that it’s a policy that you are paying for some time and therefore it makes sense to do your homework before you sign on the dotted line for such a policy. Ultimately you want to be sure you’re getting the most appropriate cover and best-value deal.
What is life insurance for?
Before you sign up for a policy, you need to work out exactly what the reasons are that you want to be covered. These are some reasons that people consider and influence them when considering what cover to take out
Bought a new home – many mortgage providers insist that you take such a policy when you buy take out a mortgage - a life insurance payout could allow your partner or family to pay off the mortgage after your death.
Having children – it’s a seismic event in anyone’s life. If you are the main bread winner in a family a life insurance payout could provide for your children while they’re growing up if they could no longer rely on your income.
Leave a legacy - a policy could provide your surviving relatives with an inheritance when you die. A nice touch and coverage need not be a lot each month
Funeral costs – a policy that could provide your family with a lump sum to assist with funeral costs.
How much cover should you take out?
In general, the more protection your life insurance policy offers, the higher your premiums.
If you’re looking to cover your mortgage, working out how much cover you need should be straightforward.
If you want to provide your family with a regular income after your death, you should look at your current outgoings, think about possible future cost, consider how old your children are and how much you could compromise the family’s income going forward and look at calculations from an Insurance provider.
When you buy life cover, it can last either for a fixed period or for the rest of your life...
A policy that lasts for a fixed time period is known as term. If you only want cover for your mortgage — which will typically last 25 years — or to give your family a financial safety net, then term insurance is usually more appropriate. The downside to term insurance is that if you live longer than the policy term there’s no payout, so it might be worth looking at a different type of policy.
If, on the other hand, you want the policy to provide an inheritance whole-of-life insurance could be a better bet.
Life Insurance, fixed or variable costs?
If you’re covering your mortgage, the amount you owe will fall over the duration that you make monthly repayments - it makes sense therefore that the scale of your life cover reduces in line with the loan. This is known as decreasing term insurance.
Premiums overall tend to be lower than level term insurance, which stay fixed throughout the term of the policy.
Should you get cover for your partner too?
There are quite obvious and indeed traditional reasons for the main earner in a family to take out life insurance cover. However if the partner earns less or works part time or they’re a stay-at-home parent there could still be a financial impact if they died. Ultimately in the latter case initially at least it could be expensive to continue to work and hire a nanny or send the children to private boarding schools. Even basic child care or domestic work assistance could prove expensive.
If both partners want cover you can either buy joint life insurance or two separate policies. Joint cover only pays out on the first death after which the policy ends. Separate policies would of course involve a continuum of coverage. This option may be more expensive, but it’s worth comparing prices to see whether it’s worth both of you getting covered
Should you get cover for your partner too?
Traditionally, the main earner in a family would take out life cover. However, if one partner earns less or they’re a stay-at-home parent, there could still be a financial impact if they died.
As well as the scope of cover and how long it lasts, there are a number of issues that can impact the size of your premiums, including:
- Your age
- Your health
- Your lifestyle
- Your family medical history
Hazardous jobs and hobbies might also affect the size of your premiums - if you’re a police officer or enjoy off-piste skiing then you might see your premiums be above market average.
Saving tax and hassle
One more thing to consider is writing your life insurance policy in trust. This means your family may be able to get hold of any payout with the least hassle and the lowest possible tax charge when you die.
Writing your life insurance policy in trust means the cover is ring-fenced outside of the rest of your assets, such as savings, investments and property. The key point with operating via a trust is that payments from the policy are not usually included in your estate for inheritance tax purposes.