When you’re young and single, life insurance, more correctly known as life assurance, doesn’t matter as much. However, the moment you buy a house with a loved one, or plan your first baby together, it’s time to start thinking about how they would cope if something unexpected happened.
Some employers promise their staff a death-in-service benefit, often about four times your annual basic salary. That’s a great perk but for many people, it wouldn’t pay off the mortgage or meet the future costs of their children’s education.
That makes cover essential if you want to guarantee the financial security of the people you’d leave behind.
Do I need life assurance?
If you’re the main breadwinner in your household, you’ll almost certainly want to consider life assurance. But it’s not just the chief wage earner that needs to think about cover.
For example, if you have a partner who is caring for your children and that person died, you could face new costs such as having to pay someone for childcare.
It’s tough to assess how a tragedy might change the lives of those you love – but it would be even tougher for them to face financial hardship on top of their loss.
What kind of policies are there?
The most popular and simple kind of protection is called term assurance, where your family receive a payment in the event of your death. This can be bought singly or jointly and you can specify the term, for example, the length of the mortgage, or the estimated dependency of any children.
It’s this kind of life assurance we’ll be focusing on in this article.
What are my term assurance options?
Within term cover, you again have a number of options. You can buy level cover, which will pay out a fixed lump sum if you die during the policy. But you could also choose increasing or decreasing cover.
Increasing cover protects you against inflation. The payment your family would receive should you die is linked to the retail prices index or average earnings. That means the cover wouldn’t devalue over time.
Decreasing cover is for people whose main concern is the mortgage. As the mortgage is gradually paid off, less cover is needed, so it falls. This can be a useful way of bringing down the price of premiums, but people with other commitments, like children, may want a more substantial policy.
Other types of life cover
However, there are other kinds of policies you may wish to consider. Whole of life assurance means your family are guaranteed a cash sum whenever you die – even if you enjoy a lengthy old age. The only problem is it’s expensive so most people opt for other types of life cover.
Another option, which is becoming increasingly popular, is family income benefit. Rather than paying out a lump sum, it pays a tax-free monthly income until the end of the term of the plan.
In many ways this can be preferential. Unless the idea is to use a lump sum payment to clear the mortgage, a monthly income which can help your surviving partner and children keep the home running in as normal a way as possible can provide real financial security.
How much cover should I take out?
Think seriously about the amount of protection your family would need if you were to die.
Look at the size of your mortgage and any outstanding debts, and also consider how much money your family would need to meet costs like school fees, bills and living costs if you were no longer around – not to mention luxuries like holidays.
Grim as it may seem, you’ll also need to consider the cost of funeral arrangements. Age Concern predicts the average funeral will cost £3,794 by 2014 – that’s a lot of money for your partner to find in a hurry.
If you are struggling to work out how much cover you need, a guide figure is around 10-times your salary – but this will vary depending on your circumstances. If your mortgage is only small, you have significant savings or your partner earns a high salary, you may decide you don’t need that amount of cover.
On the flip side, if you have a large mortgage and young children in private education, 10 times your salary may not be enough to secure your family’s future in the event of your death.
It’s well worth speaking to a qualified adviser for guidance on which type of cover is most suitable and what level of insurance you need. While you don’t want to be underinsured, there is equally little point in paying more than you need.
What is critical illness cover and is it for me?
Critical illness cover can be built into your life assurance plan. It means your provider will not only pay out in the event of your death, but also if you were diagnosed with any of the illnesses specified by the provider. Some insurers cover you for a wider number of diseases than others.
This kind of cover can give you even more peace of mind than a straightforward life assurance policy, because you could well need money to meet costs if you became ill.
You don’t want to worry about mortgages and bills if you’re sick, and you may also need help with medical bills or even home renovations if your mobility is affected. However, adding critical illness cover to your policy is likely to increase the cost.
How can I bring down the cost of my cover?
The younger you are when you take out a policy, the cheaper your premiums will be because you’ll be statistically unlikely to claim, at least during the earlier years.
Another way to lower your premiums is to make yourself less risky for insurers. Smokers, for example, pay far more for their cover than non-smokers.
In fact, moneysupermarket.com research found that a UK adult who gave up smoking could save an average of £6,044 on combined critical illness and life cover. That’s on top of the money they’d save by ditching the cigs.
Do I need income protection?
Even with decent life assurance in place, you may still want to take out income protection. It’s a less popular kind of policy but definitely one to consider.
Taking out an income protection policy means your salary would be paid in the event that accident, illness or disability prevents you from working. It would pay a percentage of your monthly salary until you can return to work, or to the end of your working life if you are never able to go back.
In the event that you had to take a lower-paid role as a result, it would help you bridge the gap in your income.
Bear in mind that, even if your critical illness cover paid you a lump sum, you’d still need to meet your ongoing bills and costs. Income protection is a great way to do that.
Some cover top tips
When you’re looking for the right protection for your family, consider the following tips.
- Don’t be swayed by the lowest premiums or incentives, find the policy that gives you the cover you need at the best value possible.
- Make sure all the information you give an insurer is correct, otherwise a future claim could be rejected.
- Review your cover whenever your circumstances change, for example, if you have a child, change jobs or take on more debt.
- When you replace a policy, seek advice and compare like for like – otherwise you may find a cheaper policy but end up with less protection. Don’t cancel your protection until the new cover is in place.
- If the cover you need is too expensive, consider taking out some initial critical illness cover that you can add to at a later date.
What’s right for you?
Deciding on the right life insurance policy for your circumstances can be tricky and you should give careful thought to how you can best protect your dependents.
However, if you’re still not sure, it’s worth speaking to an adviser about your specific needs. You can leave your details and we'll arrange for an adviser to call you to discuss your term assurance options, or you can call our experts 0844 209 8737.