Few people rush out to buy life insurance – it’s hardly a glamorous purchase and nobody really wants to think about their own death. But a decent life policy is a must-have for people with dependents and other responsibilities.
So who needs it?
Life insurance pays out a lump sum or regular income on death. It is therefore an essential purchase if you have a partner or have children who rely on your earnings.
For example, if you are the sole breadwinner in the family, without life insurance your loved ones might not be able to fund the mortgage, rent or other day-to-day expenses if you were to die.
What if you and your partner are both employed? You might not think you need life insurance if you are both earners. Surely your partner could manage on his or her own salary after your death?
Insurers take into account a number of factors when setting the premiums for life insurance, including the type of policy and the amount of cover
But would one income be enough to support the household? It’s highly unlikely the bills would decrease in size and number in line with the loss of the deceased’s income, so joint life insurance should be the order of the day.
Life insurance is important even if you are a stay-at-home parent who does not bring an income into the house.
You might not bring in any money, but your death could still have a financial impact on the family. Who would care for the children, for example, if you were not around? Assuming your partner could not afford to give up work, could he or she afford to pay for a nanny or childminder, and for someone to do the household chores?
People often assume they can forgo life insurance if they have death-in-service cover through their employer.
Death-in-service benefit pays out a tax-free sum – sometimes as much as four times your annual salary – if you die while still employed by the firm. It can be valuable, but it’s not necessarily a substitute for your own life cover, when the sum insured is normally set at a much higher level.
Some advisers recommend life insurance of 10 times your annual salary, but your own needs will be determined by your financial commitments and requirements. But you should always take any death-in-service benefit into account when buying a separate policy.
The more insurance you have, the higher your premiums will be, so it’s important to be realistic.
You should also read the terms and conditions of your death-in-service benefit as the money might be paid into a discretionary trust, which means you cannot nominate the beneficiaries. Also, you cannot normally link death-in-service benefit to a mortgage.
Remember, too, that you are only covered by death-in-service benefit while you remain employed by the company. If you are fired, made redundant or change jobs, the cover stops, potentially leaving your loved ones exposed.
Top-up your cover
If you already have life insurance, it’s worth checking it’s up to date. You might have arranged the policy several years ago, perhaps when you lived in a smaller house with fewer children. You would therefore need to top up the cover to make sure it meets your current needs.
Of course, there are people who don’t need life insurance. If you are single with no dependents, it’s probably an unnecessary expense.
Similarly, if you are elderly and your children have long flown the nest, you might not want to fork out for life insurance premiums. However, some people take out life insurance to cover their funeral costs, or to pay an inheritance tax bill, so it’s often worth seeking advice.
Types of cover
There are various different types of life insurance. The most common is level term insurance, which pays out a fixed amount if you die within the policy term. You can also buy decreasing term insurance, where the pay-out gets gradually smaller.
Decreasing term insurance is often linked to a repayment mortgage as the amount you owe the lender also reduces over time.
Family income benefit pays out an agreed monthly income (from the date of the claim to the end of the policy term) instead of a lump sum.
Whole-of-life cover is usually the most expensive as there is no actual finite term. In other words, the policy lasts as long as you do, so is guaranteed to pay out.
Insurers take into account a number of factors when setting the premiums for life insurance, including the type of policy and the amount of cover. They will also want to know your age, occupation, state of health and might quiz you on lifestyle indicators such as your weight, alcohol consumption and whether you smoke.
When you run at quotation with MoneySuperMarket, we ask general questions to get an idea of how much you’re likely to be charged. When you click through to an insurer’s website, you might be asked for more details.
You should always compare premiums before you buy life insurance – and it’s easy with MoneySuperMarket’s free independent comparison site. We have policy details from all the leading life insurers to help you find the right cover at the right price.