No amount of money can compensate for the grief of losing a spouse or partner. But life insurance designed to cover your untimely death — known as term insurance — can at least provide financial peace of mind for your dependents if the worst happens.
What type of term insurance to choose and how can this type of coverage best protect a family? Here’s what you need to know.
What is life insurance?
‘Term’ life insurance (or life cover) provides financial protection by paying a tax-free lump sum to your family if you die during the ‘term’ of the relevant insurance policy.
The term refers to the duration of the policy. This will usually span several years and can be chosen based on your family’s needs and financial situation.
For example, if you take out a 25-year mortgage, you could take out term insurance for a similar term.
When a claim is made on the policy, the beneficiaries – in this case your family – have the right to spend the money however they see fit. Typically, this may include paying off a mortgage, paying off other household debts, or paying day-to-day expenses such as bills or, if applicable, education costs.
Some people consider that life insurance is necessary only in the case of a breadwinner – it would compensate for the loss of income. But it’s worth considering insurance for someone who takes care of home and family. Proceeds from a policy on their life could be used to purchase services that would allow the breadwinner to continue working.
How does family life insurance work?
With a life insurance policy, you pay a regular monthly or yearly premium to a life insurance provider. If you die during the term of the policy, the insurer pays a pre-agreed sum of money – known as the “sum insured” – to the beneficiaries in question.
Life cover is available from comparison sites, banks, building societies, insurance companies and even some retailers.
Who needs family life insurance?
Family life insurance can benefit a wide range of people in different situations. These include couples who have:
bought a house together
to have married
founded a family.
It also offers the assurance of a financial cushion to families with older children, as well as to single parents who want to provide for their loved ones in the event of premature death.
How much does family life insurance cost?
Life insurance premiums can start from as little as £5 a month, a relatively low outlay for providing financial peace of mind.
Cheap, however, doesn’t always mean better. Life insurance premiums depend on a number of factors including the policyholder’s age, state of health, occupation and lifestyle and whether or not he is a smoker.
Premiums will also vary depending on the amount of cover required and the duration of the policy.
As a general rule, the younger you are when you buy life insurance, the less expensive you can expect your premiums to be.
Expect to pay more if you have a risky job. Premiums for a trawler, for example, will cost more than for an office worker, although other factors affect the overall cost.
What type of life insurance is right for your family?
Life insurance for families comes in different versions, so it’s important to determine the type that meets your needs and those of your family.
Policies can be purchased on a “leveling”, “decreasing” or “increasing” term. Level term policies pay the same amount to beneficiaries regardless of when a claim is made during the term of the policy.
But the payments associated with decreasing and increasing term insurance policies change over time. This is often to reflect the changing nature of an associated financial obligation.
For example, diminishing term insurance is purchased by mortgage customers whose mortgage repayments themselves decline over time.
Whole life insurance is another version of life coverage. This is where a policy is guaranteed to pay out regardless of when a policyholder dies, rather than being limited to a specific period. This is usually the most expensive type of life insurance policy, as one claim is guaranteed at some point.
Term life insurance is the best way to generate funds for immediate use if someone dies prematurely. Whole life insurance tends to work best for complex financial planning purposes.
Adapt a policy
In addition to the type of life insurance policy you choose, there are several other considerations that should be taken into account.
There is the size of the payment, for example. At a minimum, it must be large enough to cover your debts, including the outstanding balance of a mortgage, credit cards, and any other loans. In addition to this, the amount may need to cover regular household bills and other day-to-day expenses.
Next is the duration of the duration of the policy. It may need to last until you have paid off the mortgage or, perhaps, until your children have left home and become financially independent.
Single or joint coverage?
There is also the question of whether to take out individual or joint coverage. A joint life insurance policy will cover two people in a relationship, but only provide one payout – usually when the first person dies. In this scenario, it is important to keep in mind that the remaining person would subsequently be left without any coverage.
A couple should each take out separate, individual life insurance policies to ensure that both parties were covered, regardless of who died first. Joint policies are often less expensive than two individual life insurance policies because the total amount of coverage is lower.
As with any form of insurance, when you buy life insurance it should be the best fit for you and your family.
When applying for life insurance, it is important to fully and accurately answer all questions during an application process. If you omit important details, it can have serious consequences if the time comes to make a claim on your insurance policy – in the worst case, the insurance company could refuse to pay because they received bad information.
When subscribing, it is also important that you know the “exclusions” applied by your insurer to the life insurance contract in question. These are things that are not covered by the policy and could prevent the payment of a future claim.
Exclusions include death due to alcohol or drug abuse. Suicide is often excluded from payouts in the first year or two of most life insurance policies.
When should I review my insurance?
With life insurance in place, it is worth regularly checking the documents to ensure that it offers sufficient cover. This is especially relevant after major life events, such as having another baby, moving house, or taking out a larger mortgage.
In these scenarios, you will likely need to increase the level of coverage, which will lead to higher premiums. On the positive side, this means that your family will remain properly protected.
Those looking for a different way to support loved ones financially may also consider taking out Family Income Allowance. Instead of providing a lump sum cash on death, this pays a tax-free monthly income to your family if you die during the term of the policy, until the end of the term.
So if you had a 10-year family income benefit policy and you died in the fourth year of that term, payments would be made for six years.
If the cost of life insurance is a concern, Family Income Allowance may be a more affordable option. Coping with a steady income can also be easier than trying to manage what to do with a one-time lump sum.