Life Insurance

If you’ve ever been out in a small boat, you will have worn a life jacket. The chances are you won’t need to use it, but if things did go wrong on the water, you’d certainly be glad you were wearing one! Insurance is like the life jacket for our money, and having the right cover in place can make all the difference should you ever need it.

You have insurance for your house, for your car, maybe for your pet, but do you have insurance for you? Have you considered what would happen to those closest to you when you’re no longer around? In this episode we’re going to look at life insurance, what it is, the different types of life insurance, and whether or not you need it.

Types of life insurance

First, let’s get a quick overview of some of the different types of life insurance. Life insurance falls into two main categories — fixed term and whole life. Fixed term will insure you for a specified number of years, and will pay out if you pass away during that time. Whole life policies have a guaranteed pay out when you die, whenever that may be, as long as your policy is still active. Because of how they work, whole life policies are generally a lot more expensive for the same payout when compared to term life policies.

Term life insurance can be level term, which provides a fixed payout; increasing term, which aims to combat inflation by providing a payout that increases over time; or decreasing term, which is designed to cover the remaining balance of a mortgage or similar debt, with a payout that decreases over time. There’s also family income benefit insurance, which is a fixed term policy that provides a guaranteed regular income for your family instead of a lump sum payment.

Whole life falls into two main categories — balanced cover and maximum cover. Balanced, or standard cover has an agreed payout for a fixed premium throughout the policy. With maximum cover, your cover is linked to an investment fund, and if those investments don’t perform at the level the insurer wanted, the final payout may decrease, or your monthly premiums may increase, sometimes substantially.

Whole life insurance can be useful for things like covering an inheritance tax bill.

But beware as some whole life policies might not be worthwhile. Over 50s life insurance is an example of whole life insurance, but when you run the numbers, unless you die much younger than the average life expectancy, you can end up paying more into the policy than will be paid out when you die. And if you miss a payment, it could be that nothing is paid out at all. In most cases, you’d be better off investing your money elsewhere.

Do you need it?

There’s a 100% chance you’ll die, but only 30% of people in the UK have life insurance. So do you need it? Life insurance is not a legal requirement and is not required by mortgage companies, but they do encourage you to have life insurance to cover the outstanding mortgage balance. This is a wise move. If you pass away before your house is paid off, it can fall to your loved ones to keep up the mortgage payments which can be a major financial burden at an already devastating time. Decreasing term life insurance is designed to cover for this eventually and will pay off the house in full in the event of your death, meaning that you leave behind an asset not a liability.

Having life insurance is also a smart move if you have any dependents, such as children who live with you. If you or your partner were no longer around, consider the financial implications of your family income being reduced as well as additional childcare expenses. Life insurance in this case can make the world of difference for those left behind.

The other reason you might want life insurance is to cover funeral expenses. The average cost of dying in the UK, which includes including funeral, send-off, and professional fees, is over £9000. Without life insurance, it could fall to your loved ones to cover these costs themselves.

So if you don’t have a mortgage, you have no dependants, and you have enough money saved to cover funeral expenses, you might not need life insurance. Otherwise, it’s a really smart move.

Even if you don’t feel you need life insurance, you might choose to have it as part of the legacy you leave. The payout could form part of the inheritance for your children, or be left to a charity so that you can have an impact even when you’re no longer around.

How to buy life insurance

There are many options when buying life insurance and things can get complicated. The last thing you want to do is to pay into a policy that doesn’t provide the right cover for you, so this is not a type of insurance that you should be buying from a price comparison website. Instead, speak to a financial advisor that can help you navigate the complexities, get the right level of cover for you, and get you the best deal. In fact, studies show that you’ll actually get a better price on average going through an advisor.

But be careful who it is you’re speaking to. Ask how they’re getting paid and make sure that they have your best interests at heart and aren’t just trying to make a sale.

The younger you are, the cheaper your policy will be when it comes to term life insurance. You can get a lot of cover for not much money, and it’s not difficult to set up. The average cost of a life insurance policy in the UK right now is around £38 per month, so probably around the same as you pay for your phone or internet service.

Conclusion

Like when writing a will, it’s not fun to have to consider your own mortality when setting up life insurance, but it’s an important aspect of being a responsible adult and loving those closest to you who will be hardest hit if you were to pass. The chances are, of course, that you won’t need life insurance — most of us will live well into old age. But if the worst should happen, protecting the financial future of those you leave behind should be a top priority.

This has just been a very quick overview of the many options for life insurance, I hope it’s been helpful as a starting point for you to do your own research. If you have any questions or suggestions for future episodes, please get in touch. You can email us at finance@proclaimers.com. Thanks!

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