Life insurance will provide your family with a guaranteed cash lump sum or an income for a fixed period of time to help them cope in the event of your death.
It can make the difference between your loved ones struggling financially and maybe having to move home, and their being able to pay the mortgage or the rent and maintain a similar standard of living while coming to terms with your death.
Here, we explain how life insurance works and help you decide whether you need it, and how much cover you should get.
What is life insurance?
Life insurance pays out a lump sum or a regular income to your partner or family if you die within the policy ‘term’ – for this reason it is also known as ‘term insurance’.
There is another type of life insurance known as ‘whole of life’, which pays out whenever you die. But this is generally viewed as an investment and financial planning tool – for protection purposes, term insurance is your best bet.
With a term insurance policy, you can choose between ‘level’ cover, which pays out the same amount no matter when you die, and ‘decreasing’ cover, where the amount paid out reduces as your mortgage is paid down (lowering your premium).
With an ‘increasing’ policy, you pay a higher premium but the amount that would be paid out increases to take account of inflation during the term of the policy.
Getting the right policy
With term assurance, you decide how long the policy runs for and how much is paid out if you die within this term.
If you go for the ‘family income benefit’ option, the pay-out will be in the form of a monthly income rather than a lump sum. These monthly payments can be linked to inflation, but they will only continue until the policy comes to an end. So if you die six months before the policy ends, your family will only receive six payments as a result.
Couples also need to decide whether to insure both their lives separately or to take out a joint life insurance policy that pays out either on the first or second partner’s death.
Do I need life insurance?
Mortgage lenders usually insist on their customers taking out a life insurance policy when they take out a mortgage. This protects their financial interest and means the mortgage can be settled.
But most people take out life insurance to protect the people who rely on them financially, such as their children.
If you’ve paid off your mortgage and have no dependents, you have a less pressing need for cover.
Similarly, single people often feel that they can do without life cover because they do not have to worry about supporting any dependents after their death. However, younger couples without children often decide that life insurance is worth paying for, particularly for the main breadwinner.
This is so that the surviving partner will not have to worry about money while he or she grieves.
Whatever your situation, if you are considering life insurance, check first whether your employment contract includes a “death in service” benefit that will go to your family should you die.
You need to work out whether this is sufficient protection and you may decide to top it up with a personal policy.
Remember, the size of your premium will be affected by the amount of cover you have.
How much cover should I have?
Experts reckon 10 times the annual income of the main breadwinner is a good ‘sum insured’ for any family. This allows plenty of breathing space if the worst happens.
Many ‘death in service’ arrangements provide four times salary.
What factors affect the cost of life insurance?
The type of life insurance policy you choose, and of course the sum assured, will have a big impact on the cost.
Decreasing term life assurance, for example, is generally cheaper than level term assurance because the sum assured goes down in line with your mortgage debt (but is only really suitable to cover a standard repayment mortgage on which the capital reduces consistently over the years).
Other factors that will be taken into account when calculating your premiums include your age, sex, general health and lifestyle – for example, if you smoke or drink a lot of alcohol.
Extras such as critical illness insurance, which pays out if you contract one of the conditions on a pre-determined list of diseases, can make a big difference to the cost too.
How can I cut the cost of life insurance?
As explained above, the amount you pay for life insurance will depend on a number of factors, including the type of policy you choose and how you live. Easy ways to cut the cost of life insurance therefore include giving up smoking, reducing your alcohol intake and losing weight if necessary.
For healthy, young people, the most basic life insurance policies start from just a few pounds a month.
But whatever sort of life insurance you want, it is vital to shop around to ensure you are not paying over the odds.
MoneySuperMarket allows you to compare the cost of policies from leading insurance companies in just a few minutes, or you can speak to a qualified adviser who can search the market and advise you on the right policy.
Call us for free, impartial advice on 0800 170 1970.
How often should I review my life insurance?
It is a good idea to review the level of life insurance you have whenever you celebrate a major life event such as getting married, having another child or buying a more expensive home. Otherwise, the cover you have could prove insufficient to prevent your loved ones suffering financially in the event of your death.
Does life insurance always pay out?
Life insurance claims are generally fairly clear-cut, for obvious reasons. Figures from the Association of British Insurers indicate that only 2% of the life insurance claims made in 2012 were rejected, mainly because of fraud or because the policyholder failed to disclose important information when applying for cover.
It’s worth remembering that claims can be turned down if you fail to disclose even minor details about your health when taking out a policy.
To ensure that your loved ones receive the financial help they need should you die – and do not face a battle for a payout – it is therefore crucial to give full and accurate information when applying for life insurance.