What life insurance options are there for families?
The term ‘family life insurance’ simply means life insurance, but is often used as a way to explain how this kind of policy can offer a financial lifeline to your relatives or dependants. It pays out a lump sum or a regular income on death that could, for example, clear a mortgage, a debt, or cover day-to-day expenses or specific obligations, such as school fees.
Understanding life insurance types
There are various different types of life insurance, with each differing in the amount of cover they provide as well as the amount they cost. The best thing to do is to compare life insurance policies from different providers to find the right level of cover, at a price that suits you and your circumstances.
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
Whole of life assurance is different because it pays out upon your death, regardless of when it occurs. 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.
Term insurance is the simplest and often the cheapest because it pays out only if you die within the defined term.
How to choose the right life insurance policy
You can buy level term insurance, where the pay-out remains the same regardless of whether you die in year one or year 25.
Another alternative is decreasing term insurance, where 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 insurance. 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 a lost 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 policies are fixed throughout the policy term. However, decreasing term insurance and family income benefit insurance tend to be cheaper than level term insurance.
Joint life insurance
If you have a partner and are working to a budget, you might find that a joint life insurance policy is the best option for you both. Joint life insurance is generally cheaper than single level life insurance, as there is usually only one pay-out per couple. Depending on your policy, the pay-out will come after the first death (first death policy) or after both members of the couple have passed away (second death policy).
Single level life insurance is slightly more popular at 58.4%, while joint life insurance is a bit less common at 41.6% *.
*MoneySuperMarket data for January to March 2018, showing the split between single and joint life insurance quotes. Correct as of April 2018.
Choosing the right amount of family life cover
The amount of family life cover you need depends largely on the following considerations:
- Your personal circumstances and family size/number of dependants
- Your budget
- The size of your mortgage
- 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.
MoneySuperMarket data for January to April 2018, showing the average cost of life insurance premiums without critical illness cover by age group. Correct as of April 2018.
How much does family life insurance cost?
Insurers take into account a number of risk factors when setting the premiums for life insurance. Older people are considered 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, while dangerous occupations and pastimes can also push up premiums.
If you and your partner opt for joint life insurance, it’s worth remembering that if you have a first death policy, the surviving person would be left without any life insurance once the policy pays out.
This means that if the surviving person wanted to take out their own life insurance policy, the price of the premium may be vastly more expensive due to advanced age or deteriorated health. For example, someone aged under 25 would on average pay around £21.86 for a joint life insurance premium (with critical illness cover), while the same policy would cost £141.07 for someone aged 46 to 65.
For tips on what to consider when choosing how much cover you need, read our dedicated guide page.
MoneySuperMarket data for January to April 2018, showing the average cost of life insurance premiums, with critical illness cover included, by age group. Correct as of April 2018.
Other types of cover worth considering
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.
You should consider writing your family life insurance ‘in trust’ so that your family will not be liable for inheritance tax on any pay-out. It’s a simple process and the insurer or your broker should be able to help you with the paperwork.
Life insurance for children
If life insurance for children is a priority for you, there may be an option to add this on to a term life insurance policy. This will be an additional cost to your standard term life insurance and will usually cover your child or children for a smaller amount, usually around £20,000 (the exact amount will depend on your policy).
Comparing life insurance premiums
Premiums can vary significantly from insurer to insurer, so it makes financial sense to shop around for the best deal, especially for something as important as life insurance.
It’s easy to compare family life insurance with MoneySuperMarket – all you need to do is answer some questions about your age, your health and your circumstances. After you’ve answered these questions, you can find details of hundreds of different policies from the country’s leading insurers and choose the one that suits you the best.