It’s not easy to tackle the subject of death, particularly your own. But how would your loved ones manage if you were to die?
Would your husband or wife be able to pay the mortgage without your income? Do you have children? How would your partner cope with the financial strains of bringing up little ones as a single parent?
Most of us would like to provide for our family after our death, which is why life insurance is so important. A decent policy can buy financial security for your nearest and dearest, but there are various different types of life insurance and you should make sure you understand your options so you can choose the best plan for you and your family.
There are essentially two different types of life insurance – ‘term’ insurance and ‘whole of life’ insurance. Term insurance is the most straightforward and usually the cheapest as it only pays out if you die within the chosen term. For example, you might take out a 20-year term insurance plan, so if you died after 15 years, your family would be able to claim.
A decent policy can buy financial security for your nearest and dearest
The premiums are usually fixed throughout the term and people often take out term insurance to link with a specific expense. The policy could, for example, tie in with your mortgage. Or perhaps you could take out term insurance to cover a commitment to school fees. If you survive to the end of the term, there is no pay-out or return of premiums – the policy simply ends.
Term insurance comes in different forms. If you opt for ‘level’ term insurance, the payout stays the same throughout the policy term. In other words, if you took out a 20-year plan for £100,000, the payout would be £100,000 whether you died in year 1 or year 19.
With ‘decreasing’ term insurance, the potential pay-out gets smaller over the course of the term. It is often linked to a repayment mortgage because the amount you owe decreases over time. Let’s say you have a £200,000 mortgage over 20 years. You could arrange decreasing term insurance over 20 years so that your family would receive £200,000 if you died in year 1 but only £1,000 if you died in year 19.
The premiums for decreasing term insurance are fixed, but it is cheaper than level term insurance.
Life insurance can pay out a lump sum, or you can arrange for the policy to pay a regular income to your beneficiaries if you die. This is referred to as ‘family income benefit’. It’s often easier to manage a regular income than a lump sum, and your family will not have to worry about investing the pay-out, or any fees of investment advice.
You can arrange for the policy to pay an income equivalent to your salary, and the pay-out could be ‘index-linked’ so that it rises to take account of inflation. The payments continue until the end of the original policy term.
Premiums for family income benefit are also generally lower as the payout is smaller the longer you live. For example, if you took out a 20-year policy to pay £50,000 a year and died after two years, the plan would have to pay out £50,000 for 18 years - £900,000. But if you died after 15 years, it would pay out £50,000 a year for only five years - £250,000.
Whole of life
Whole of life assurance is typically the most expensive life cover option because it pays out whenever you die – in other words, a pay-out is a certainty, unlike with term insurance. If you want to guarantee a payout to your beneficiaries, whole of life assurance is therefore worth considering.
You can buy joint life or single life insurance. Joint life insurance is convenient for couples as they only have to deal with one set of documents, but it pays out only on the death of the first partner. So if the surviving partner then wants to buy their own policy, it could prove expensive as life insurance premiums rise with age – and they are likely to be older than when they first took out a policy.
Single life policy
If you and your partner each take out single life policies, your family can claim after both deaths. It can also be easier to arrange single life insurance if you earn different amounts, or you are much older than your partner and/or in a poorer state of health. You might also find that there is little difference in the premiums between one joint life policy and two single policies.
There are various optional extras you can add on to a life insurance policy. Critical illness is one of the most common and pays out a lump sum if you are diagnosed with one of a list of specified and serious conditions such as a heart attack or cancer. There is usually only one payout, so your family would not then be able to claim on your death.
Many life insurance firms offer terminal illness cover, so the policy would pay out if you were given less than 12 months to live. Waiver of premium is another common add-on and covers the cost of the policy premiums if you cannot work because of sickness or injury.