Death isn’t an easy subject to discuss, especially your own. But it happens to us all, and the big question is, how would your family manage if you died?
As there are various types of life insurance available, you should make sure you understand the best options for you. Then, you can choose the best plan for you and your family.
Essentially, there are two types of insurance you will be interested in – term insurance and whole-of-life insurance – but which makes more sense for your needs?
"As there are various types of life insurance available, you should make sure you understand the best options for you."
Term insurance is the most straightforward, which often equates to also being the cheapest due to it only paying out if you die within the term agreed.
For example, if you take out a 20-year term insurance plan and die 15 years later, your family then claim the policy. However, if you die outside of this term your family won’t receive a payout. .
Premiums are normally fixed throughout the term, meaning you won’t pay more until the term is over. Most people take out term insurance to link with a specific expense, such as a mortgage.
You can also take out term insurance to tie in with a commitment that has a specific duration, like school fees. If you survive until the end of the policy, then there’ll be no payout or return of premiums – the policy simply ends.
There are a few different forms of term insurance, such as level and decreasing term.
If you opt for level term insurance, the payout stays the same throughout. In other words, if you took a plan for £100,000 over 20-years, the payout would stay £100,000 whether or not you died in year one or year 19.
With decreasing term insurance, the potential payout becomes smaller over time, and for this reason is often linked to a repayment mortgage. As the amount you owe on the mortgage decreases, so does the insurance.
If you had a £200,000 mortgage, say, over 20 years, you could arrange decreasing term insurance which also lasts for 20 years. For example, if in year one you receive a £200,000 payout, then in year 19 you would only receive £1000.
The premiums for both types are fixed, but it is decreasing term is cheaper than level term insurance because insurers would normally pay out less.
You can choose either a lump sum or arrange for the policy to pay out a regular monthly income to your loved ones when you die.
Referred to as a family income benefit, it almost acts as a salary for your family, allowing them to keep up with mortgage payments, bills and household costs.
It can be easier to manage, taking the worry of investment fees and decisions out of the equation after you’re gone.
If you arrange for the policy to pay an income which is the equivalent of your salary, then the payout could be ‘index linked’ with the Retail Prices Index taking inflation into account. The payments continue until the end of the original policy term.
Plus, as the payout is smaller the longer you live, premiums for family income benefit policies tend to be cheaper.
Whole of life
Typically the most expensive life cover option, whole-of-life assurance pays out whenever you die. In other words, it is guaranteed to pay out, unlike term insurance which you might outlive.
If you want an insurance that will benefit your family no matter what, then whole-of-life assurance is well worth considering.
Joint life versus single life policy
You can choose from joint life or single life insurance. Joint life insurance is convenient for couples, as they only need to worry about one set of documents and can often be a lot cheaper than than two single policies.
However, it only pays out on the death of the first partner, which can be problematic for the second partner.
Because if the surviving partner then wishes to buy themselves a new policy, it can prove expensive as life insurance premiums rise with age. They are more likely to be older and perhaps less healthy than when then took out the first policy.
However, if you and your partner each buy a single life policy, your family can claim after both deaths.
It can also be much simpler to arrange than joint life, because you may earn different amounts, have a large age gap or be in a poorer state of wellbeing.
Also, you might find there is very little difference between the joint life and two single life policies in monetary terms – the premiums may be very close.
There are a few optional extras you can add on to a policy. Critical illness is being of the most common, due to it paying out a lump sum should you be diagnosed with a serious condition.
The list is varied but includes specific illness and problems such as cancer, heart attacks, severe injuries and strokes. However, there is usually only one payout, so your family would not be able to claim on your death.
Many insurance firms also offer terminal illness cover, where the policy pays out if you are given less than 12 months to live.
Another common add-on is waiver of premium, which covers the cost of the policy premiums should you find yourself unable to work due to sickness or injury.