Money can compensate for the pain of the heart of losing a life partner or partner. But life insurance that’s designed to cover your premature death — known as term insurance — can at least provide peace of mind to your dependents if the worst-case scenario happens.
Which type of term insurance should you choose, and how can this type of cover best protect a family? Here’s what you need to know.
What is life insurance?
‘Term’ life insurance (or life insurance) provides financial protection by paying a tax-free lump sum to your family in case you die within the ‘term’ of the respective insurance policy.
The term refers to how long the policy lasts. It will usually last for many years and can be chosen to match your family’s needs and financial circumstances.
For example, if you arrange for a 25-year mortgage, you can buy term insurance for the same tenure.
When a claim is made on the policy, the beneficiary – in this case your family – is entitled to spend the money in whatever way they deem appropriate. Typically, this can include clearing a mortgage, paying off other home loans, or meeting regular living expenses such as bills or, where relevant, educational costs.
Some consider life insurance to be necessary only in the case of the earner – it will compensate for the loss of income. But it is worth considering insurance for the person looking after the home and family. The proceeds of a policy over their life can be used to buy into services that enable the earner to continue working.
How does family life insurance work?
With a life insurance policy, you pay regular monthly or annual premiums to the life insurance provider. If you die within the term of the policy, the insurer pays the concerned beneficiaries a pre-agreed cash amount – known as the ‘Sum Assured’.
Life cover is available from comparison sites, banks, building societies, insurance companies and even some retailers.
Who needs family life insurance?
Family life insurance can benefit a wide range of people in different situations. These include couples who have:
- bought a house together
- got married
- started a family.
It also provides assurance of a financial cushion for families with older children as well as single parents who are concerned about making provisions for loved ones in case they pass away early.
How much does family life insurance cost?
Life insurance premiums can start from as low as £5 per month, which is a relatively small outlay to secure financial peace of mind.
However, cheap doesn’t always mean best. The life insurance premium depends on a number of factors including the age, health, occupation and lifestyle of the policyholder and whether he is a smoker or not.
The premium will also vary according to the amount of cover required and the term of the policy term.
In general, the younger you are when taking out life insurance, the cheaper you can expect your premiums to be.
Expect to pay more if you have a risky job. The premium for a trawler fisherman, for example, will cost more than for a desk-bound office worker, although other factors will affect the overall cost.
Which type of life insurance is right for your family?
Life insurance for families comes in different versions, so it’s important to choose which one suits the needs of you and your family.
Policies can be derived on the basis of the term ‘level’, ‘decreasing’, or ‘increasing’. Level term policy pays the same amount to the beneficiaries irrespective of the claim over the life of the policy.
But the payouts associated with decreasing and increasing term insurance policies change over time. This is often to reflect the changing nature of an associated financial obligation.
For example, diminishing term insurance is taken by home loan customers whose mortgage payments themselves reduce over time.
Whole life insurance is another form of life insurance. This is where a policy is guaranteed to pay out when the policyholder dies, rather than being limited to a specific time frame. It is usually the most expensive type of life insurance policy as the claim is guaranteed at some point.
Term life cover is the best way to generate wealth for immediate use if one dies prematurely. Whole life cover works better for complex financial planning purposes.
Along with the type of life insurance policy you choose, there are many other considerations that need to be considered.
For example, the size of the pay-out is. At a minimum, it should be sufficiently large to cover your debts, including the amount owed on mortgages, credit cards and any other debt. In addition, the amount may be needed to cover ongoing household bills and other daily costs.
Next is the length of the tenure on the policy. This may need to last until you pay off the mortgage or, perhaps, until your children leave home to become financially independent.
Single or joint cover?
There is also the question of taking out a single or joint cover. A joint life insurance policy will cover two people in a relationship, but provides only one pay-out – usually where the first person dies. In this scenario, it is important to note that the remaining person will be left without any cover later.
A couple would need to take out separate, single life insurance policies to ensure both parties were covered, regardless of who passed away first. Joint policies are often cheaper than two single life policies because the total amount of cover is less.
Like any type of insurance, when you take out life insurance it should be best suited for the particular circumstances of you and your family.
When you apply to take out life insurance, it is important to give complete and accurate answers to any questions you may have during the application process. If you leave out important details it can have dire consequences when it comes time to claim your insurance policy – in the worst case, the insurance company may refuse to pay because it was given incorrect information.
While taking out the cover, it is also important that you are aware of any ‘exclusions’ that may be imposed by your insurer on the life insurance policy in question. These are things that are not covered by the policy and can prevent a future claim from being paid.
Exclusions include death due to alcohol or drug abuse. Suicide is often excluded from payments in the first year or two of life insurance policies.
When should I review my insurance?
With life insurance, it is worth checking the paperwork regularly to ensure that it offers an adequate amount of cover. This is especially relevant after major life events such as having another child, moving home, or taking out a major mortgage.
In these scenarios, you will probably need to increase the level of cover which will result in higher premiums. Plus, it means that your family will be adequately protected.
Those who are looking for a different means to support their loved ones financially can also consider taking the family income benefit. Instead of providing a lump sum cash on death, it pays monthly tax-free income to your family if you die within the term of the policy, which lasts till the end of the term.
So if you had a 10-year family income benefit policy and died in the fourth year of that term, the payments would be made for six years.
If the cost of life insurance is a concern, the Family Income Benefit may be a more affordable option. It can also be easier to deal with a regular income than trying to manage what to do with a lump sum.