We all want to provide for our family, whether we have a new baby or a couple of teenagers. So we work hard to pay the mortgage and put food on the table. But what would happen to your loved ones in the event of your death? If they could not rely on your salary, how would they manage financially?
Family life insurance, another way of describing life insurance, pays out a lump sum or a regular income on death and can offer a financial lifeline to grieving relatives. A policy could, for example, clear the mortgage or any other debts so your family would not have to worry about losing the roof over their heads. It could also cover day-to-day expenses or even a specific commitment, such as school fees.
There are various different types of life insurance. Term insurance is the simplest and often the cheapest because it pays out only if you die within the defined term. For example, you might take out a 25-year plan so the policy would pay out if you were to die in the next 25 years. Your family would get nothing if you were to die after the end of the term.
The size of your mortgage can also help to determine the size of the sum insured
You can buy level term insurance, where the pay-out remains the same whether you die in year one or year 25. Or you can arrange decreasing term insurance so the pay-out gets gradually smaller. For example, a policy might pay out £100,000 in year one but only £5,000 in year 25.
Decreasing term insurance is often linked to a repayment mortgage because the amount you owe the lender dwindles over time.
Another option is family income benefit. Here, instead of a lump sum pay-out, the insurer commits to paying a set monthly income from the time of the claim to the end of the agreed policy term.
A regular income can be easier to manage as it can simply replace your salary. Premiums can also be cheaper as the longer you live, the less the insurer has to pay out.
The premiums for both level and decreasing term insurance and for family income benefit are fixed throughout the policy term. However, decreasing term insurance and family income benefit tend to be cheaper than level term insurance.
Whole of life cover
Whole of life assurance is different because it pays out whenever you die. It is usually linked to an investment such as a pension or an endowment policy and is often the most expensive type of cover because a claim is inevitable (which is why it’s called assurance; insurance is for something that might happen). The premiums could also go up if the investment performance is poor.
Amount of cover
The amount of cover you need depends largely on your personal circumstances and your budget. If you have several young children, for example, you may need more cover than someone with one older child.
The size of your mortgage can also help to determine the size of the sum insured.
Check, too, whether you have any existing cover. For example, your employer might offer death-in-service benefit, which could pay a lump sum of around four times your annual salary if you were to die while still employed by the firm.
You should include any potential death-in-service pay-out when determining how much insurance you need to buy.
Cost of premiums
Insurers take into account a number of risk factors when setting the premiums for life insurance. Older people are obviously more risky than younger people as they are more likely to die sooner. For the same reason, someone in poor health can expect to pay more for family life insurance. Dangerous occupations and pastimes can also push up premiums.
Couples often take out joint life insurance to cover both lives. A joint life insurance policy is convenient and can be cheaper, but it’s important to remember that it pays out only on the first death. If the survivor then wants to arrange his or her own life cover, it will almost certainly be more expensive because of the increase in age.
It’s worth comparing the cost of joint and two single life policies as it often doesn’t cost much more to take out two separate policies, especially if one of you is older or in poor health.
A joint life policy will only be issued if each partner has an ‘insurable’ interest in the other – which essentially means that the death of either partner would have a negative financial impact on the survivor.
You should consider writing your family life insurance ‘in trust’ so that your family will not be liable for inheritance tax on any payout. It’s a simple process and the insurer or your broker should be able to help you with the paperwork.
Many insurers offer critical illness cover when you take out family life insurance. We are more likely to suffer a serious illness than die before the age of 65 and critical illness cover pays out a tax-free lump sum if you are diagnosed with one of a list of serious conditions within the policy term.
Remember, though, that a combined policy will pay out only once. So if you make a successful claim after the diagnosis of a listed condition, your family would not be able to claim again after your death.
If you have term insurance and buy additional critical illness cover, you would be able to claim on the critical illness insurance and, if necessary, subsequently claim on the life policy as well.
Terminal illness cover works in a similar way as you can usually claim if you are diagnosed with a fatal illness and given less than 12 months to live, though the exact wording depends on the policy. Again, there is only one payout.
Waiver of premium
You might want to pay a bit extra to include so-called waiver of premium. You would then be covered if you were unable to pay your life insurance premiums because of illness or injury. Watch out, though, as exclusions apply.
Premiums vary from insurer to insurer so you should always shop around for the best deal – and it’s easy with MoneySuperMarket’s free online comparison service. You can find details of hundreds of different policies from the country’s leading insurers all at the click of a mouse.