If you (or your partner) died unexpectedly, life insurance could take care of their financial needs and prevent an already terrible situation from becoming worse.
There are, of course, many other points to consider, such as how much insurance should you buy? Do you only insure those in the family who are earning? How long should the policy last?
We’ll help you answer all these questions below, alongside pointers you should consider while applying for cover.
Are you a breadwinner?
Could your family cope without your income, or be able to pay the mortgage?
In short, if anyone relies on your income, life insurance is a must. Even if they could pay the mortgage, there is always other financial commitments and day-to-day expenses.
Or a stay-at-home parent?
You should probably consider life insurance even if you don’t bring in a salary.
The death of a stay-at-home parent could have a financial impact, as the family would perhaps have to pay for childcare and housekeeping. This would be covered should you have insurance.
How would they be financially secure?
"In short, if anyone relies on your income, life insurance is a must."
Life insurance pays out either a lump sum or a regular income on death, thus providing a financial safety net for your loved ones.
This money can then be used to clear debts, such as an ongoing mortgage, or to fund everyday living costs.
What are the different types of cover?
Life insurance has many and varied types, but the most popular type is level term insurance.
The policy runs for a set term, say 10, 20 or 25 years, and the payout remains the same whether you die in five years or 15 years.
What about decreasing term insurance?
Decreasing term insurance is similar to level term, but the payout gets gradually smaller over the policy term.
It is often linked to a repayment mortgage because the amount you owe the lender also reduces over time.
What is family income benefit cover?
With family income benefit cover, the beneficiaries of the policy receive a monthly income rather than a lump sum payout.
The payments continue until the end of the policy term, so premiums may be cheaper because the insurer expects to pay out less overall.
For example, if you die 15 years into a 25 year cover plan, then they will only pay out for 10 years.
What does whole-of-life mean?
Both level and decreasing term insurance pay out only if you die within the term. If you take out a 20-year policy and die in year 21, your family will get nothing.
So the alternative is whole-of-life cover, which pays out whenever you die.
Whole of life assurance is usually more expensive, but then you have a guaranteed payout.
What is the difference between a single and joint life policy?
If you are in a couple, then you might be tempted to purchase a joint life policy because it is cheaper.
But it is best seeking advice before you do, because while cheaper, the joint cover only pays out once when one of the policyholders passes away.
However, after this payout, the survivor (and possibly their family) is left without cover. To buy a new policy at that point could prove costly, due to increased age or health problems.
How much cover do you need?
The amount of cover you need is known as the ‘sum insured’, which you should select according to your budget and requirements.
For example, someone with a large mortgage and three young kids should probably buy more cover than a single parent with a small flat.
Most insurance advisers recommend a sum insured equal to at least 10 times your annual salary.
What are policy add-ons?
Insurance companies offer add-ons to life insurance policies for extra security in certain circumstances.
If you opt to pay for ‘waiver of premium’, for example, your premiums will be paid automatically if you can no longer work due to an accident or illness.
It is worth speaking with an advisor for more information on each policy add-on.
What is critical illness cover?
One of the most common add-ons is critical illness cover, which pays out the sum insured if you are diagnosed with a serious condition or illness.
The list includes certain types of cancer, strokes and life-threatening injuries but will vary from provider to provider.
But be aware that while critical illness cover can be a valuable benefit it can be expensive, often costing more than the life insurance policy itself.
What will the cost of cover be?
The cost of life insurance depends on a number of different factors, including the sum insured, the type of policy and if you choose any add-ons or extras.
Insurers also look at age, occupation and your state of health before setting the premium, so it will be different for everyone. For example, a 55-year old smoker will almost certainly pay more than a 30-year old non-smoker.
Similarly, if you suffer from ill health or are older you should expect a high premium. And the insurer will doubtlessly exclude any pre-existing medical conditions.
What does making your policy ‘in trust’ mean?
Life insurance in itself isn’t taxed, but the proceeds from a life insurance payout could form part of your estate when you die.
This means that your family will be liable for inheritance tax (IHT) at 40% on the value of the estate above £325,000 (or £650,000 if you if you are married or in a civil partnership). Which, when you consider a family home is often worth that much on its own, is easy to meet.
A way to circumvent this is to write the policy ‘in trust’, which means it is placed apart from the estate. The taxman can’t then touch this money and so your family (or other beneficiaries) will get the full amount.
But to be sure, it’s definitely a good idea to seek the advice of a specialist on IHT as they will know the exact implications of putting your life insurance in trust.