This article is devoted to the crucial issue of life insurance with information and advice about:
- What life insurance is
- Whether an employee ‘death in service’ policy is enough
- The different types of life insurance cover
- How much life insurance premiums are
- Where you can find life insurance
According to the ABI (Association of British Insurers), under a third of UK working-age Britons (or 8.5 million people) have no life insurance, including half of all mortgage holders. Are they right? In this guide to life insurance, we explain everything you need to know from who needs it to advice about finding the right policy and common pitfalls to avoid.
What is life insurance?
Life insurance policies provide a safety net for your dependents in case you die. They can be paid out as a lump sum to be used for the payment of large debts (such as an outstanding mortgage) or are paid in monthly instalments for a fixed period to cover the family’s monthly expenses.
Single people and those on a low income who would be eligible for state benefits have less need for life insurance.
Although life insurance comes under the umbrella term of ‘protection insurance’, it shouldn’t be confused with policies like critical illness cover. In other words, it won’t pay out in the event of an inability to work because of an illness or accident. Some policies might pay out in case of a diagnosis of a terminal illness, but this will be stipulated in its terms and conditions.
Who needs life insurance?
The main reason to take out an insurance policy is if you have a partner who is dependent on your salary, school-age children who still need financial support and/or if you have an outstanding mortgage. Although you might decide that life insurance isn’t necessary for a partner who doesn’t work as they make no financial contribution to the household income, you should consider what would happen if they died. Would you be able to afford childcare costs in this situation? Single people and those on a low income who would be eligible for state benefits have less need for this type of insurance. In the case of low-income families, a pay-out could affect their eligibility for certain means-tested state benefits.
Is an employee ‘death in service’ insurance policy sufficient?
As part of an employee package, many workers are offered ‘death in service’ benefits which are similar to life insurance. Usually the surviving family members are given a payment which is calculated according to the breadwinner’s salary.
There are 2 main drawbacks of this employee perk. The first is that it’s only valid when you work for this employer. If you change jobs, the cover stops automatically. The other disadvantage is the level of cover on offer. Most ‘death in service’ policies usually last an average of 1 or 2 years. With young dependents, you might decide that you need more cover.
What are the different types of life insurance cover?
There are different types of life insurance. The one that you need depends on your circumstances. You can adapt the policy to suit your needs, but this would require the expertise of an insurance broker or independent financial advisor.
Term life policies
Term life insurance policies are set for a period which you specify when you take out the policy but are commonly for 5, 10 or 25 years. The insurer will pay out if you die during this period, but no lump sum is payable when the term expires.
Term life insurance can either be level-term or decreasing-term. The premiums and pay-out of level-term policies remain the same throughout the whole of the policy. By contrast, the pay-out from decreasing-term policies falls over the term of the policy. This is mainly because the debt to be paid off (such as a mortgage) will similarly fall over its term. As a result of this difference, decreasing-term policies tend to be cheaper than level-term policies.
One common type of decreasing-term policies is a family income benefit policy. This will give the family regular payments until the policy expires. It’s much easier to work out the amount of cover with this type of insurance because you would use your monthly salary as your base-line. However, if you died near the end of the policy, your family would only be entitled to a few years of payments.
As its name suggests, a whole-of-life insurance policy has no fixed term so it pays out whenever you die. As this cover is much more comprehensive, these policies tend to be the most expensive.
How much does a life insurance policy cost?
The premiums for a life insurance policy are set according to your personal circumstances, and how much of a risk you represent to the insurer. Factors taken into account include:
- Your age
- Your health
- Your lifestyle
- Whether you’re a smoker
It’s absolutely vital that you’re completely honest about all information you give to your insurer. Any misleading information (especially about the state of your health and pre-existing medical conditions) might mean cheaper premiums, but there’s a real risk your policy will be declared invalid and your dependents receive nothing.
Your monthly or annual payments also depend on the length of the policy, and how much you’d like as a pay-out. It should last long enough to see your children through full-time education and/or pay off outstanding debts. Experts recommend that x10 the breadwinner’s annual salary is a good way to calculate how much cover is necessary. In terms of cost, the younger you are, the cheaper your premiums will be while the larger the pay-out, the more expensive the insurance will be.
Should couples get joint life insurance policies?
A joint life insurance will only pay out when the first policyholder dies. The main drawback is that the policy then expires, so the surviving partner would have to take out a new policy. The premiums would probably be much more expensive as they would probably be older. It’s therefore advisable to take out two individual life insurance policies. It only costs a little more than a joint policy.
Where can you find life insurance?
Apart from the traditional places (from insurers, banks and building societies), life insurance policies are also available from supermarkets and major UK retailers. Their prices can often be cheaper even though the policies are underwritten by the same insurance companies. There are also many online price comparison sites which can give you a good idea of what’s on the market. You should use at least 2 or 3 different sites for a better overview.
Your monthly or annual life insurance payments depend on the length of the policy, and how much you’d like as a pay-out.
You should be wary of the cheapest policies which come out at the top of the site and make sure you understand their terms and conditions. They might be either low-start life insurance policies (which start at a low price but increase during their term), or they’re renewable life insurance cover which are also re-priced after 5 or 10 years.
Conclusion – Life insurance as a safety net
In their research the insurer, Aviva, found that 12 million Britons experienced a drop in income or depletion of their savings after the death of the breadwinner. Struggling financially after a bereavement makes the whole situation even worse. A life insurance policy will help your loved ones to cope, at least financially.