What is life insurance?
Life insurance is a type of insurance policy which pays out a lump sum to your beneficiaries when you die. It is designed to provide peace of mind that your loved ones won’t struggle financially in the event of your death. There are several different types of policy available, and the right one for you will depend on your individual circumstances. Here’s what you need to know.
How does life insurance work?
When you buy life insurance you pay monthly premiums, usually for a fixed term. If you die during this term, the policy will pay out a tax-free cash lump sum to your dependants. There are three main types of life insurance cover, level term assurance, decreasing term assurance and whole-of-life cover.
With level term assurance, the amount of cover you have remains the same during the term of the policy. This kind of cover is often taken out alongside interest-only mortgages, as the capital you owe does not decrease over time. With decreasing term assurance, as the name suggest, the amount of cover you have reduces over time. Decreasing policies are often taken out at the same time as a repayment mortgage, so that the amount of cover you have decreases along with the capital you owe.
Whole-of-life insurance protects you for your lifetime, but means you’ll pay premiums right up until the point you die and costs are steeper because it's guaranteed to pay-out.
How much does life insurance cost?
The amount you’ll pay for life insurance is based on your age and health, including whether you have any pre-existing medical conditions, how long you want cover for, how much cover you need and the type of policy you’ve chosen. The higher the likelihood you’ll die during the term of the policy, the more expensive your premiums are likely to be. Premiums for decreasing policies are usually cheaper than for term assurance policies because the level of cover is reducing over time. Premiums are most expensive for whole-of-life insurance because this type of cover provides protection for your whole lifetime. Bear in mind that there are several other forms of financial protection available too, which you may also want to consider. These include critical illness cover, which pays out a lump sum upon diagnosis of a serious illness, and income protection, which pays you a monthly income if you are unable to work due to accident or illness.
Do I need life insurance?
When thinking about whether you need life insurance, consider whether your dependants would be able to cope financially if you were no longer around. Would they, for example, be able to pay the mortgage and cover other monthly bills without you?
Although many employers offer ‘death-in-service’ benefit, whereby you receive a multiple of your salary if you die, this may not be enough to cover all your outgoings. It’s important to find out exactly how much you’ll be entitled to, so you can factor this in when working out how much additional life cover you might need. Remember too that death-in-service benefit cannot usually be linked to your mortgage. Don’t assume that you only need life cover if you’re the main earner. If you’re not working but responsible for childcare, you’d need to think about whether the person who is the main breadwinner would be able to stay in work and cover childcare if you were no longer around.
If you have no dependants and no-one is relying on you financially, life insurance is unlikely to be a priority. If you are much older, you’ll need to think carefully about whether the cost is affordable, as premiums become higher the older you get.
Do I need life insurance when applying for a mortgage?
None of us likes to think about dying but having cover in place means that should the unthinkable happen, your dependants won’t have financial worries at what is likely to already be a distressing time. Having life insurance isn’t compulsory when you take out a mortgage, but it is highly recommended if your loved ones would struggle to make monthly payments in the event of your death.
How Heritage can help
Our protection advisers can search the life insurance market on your behalf to help your find the right policy to suit your needs, at the right price. They will compare lots of different quotes to help you find the best possible deal, whether you are looking for life insurance with critical illness cover, or whether you want standalone life insurance cover.
Talk to us now for friendly, simple advice on the best options for you and your family.