Thinking of taking out life insurance is one of those things we all know we should have sorted out by now, but that we keep putting off until “tomorrow”. You’re young and healthy….and do you really want to be spending out a monthly premium for insurance when there are a lot more exciting things to be spending your money on? Well, not to sound dramatic, but for the parents of one child out of every 30, tomorrow never comes, which is why having Life Insurance to protect your family’s finances should the worst happen to you is so important – and it might not be as expensive as you think.
In this article I’m going to take a look at what you need to know now that you’re thinking about taking out Life Insurance, including what different types of Life Insurance there are, which policy is best for you, and how it works…
What Is Life Insurance?
Put simply, a Life Insurance policy pays out a tax-free lump sum of cash to your family when you die.
Your family can use this money to support themselves when you’re gone, pay off any debts, cover any funeral costs, and maybe even pay off the mortgage.
As with other insurance policies you pay a monthly premium when you take out your policy, and this amount will depend on the type of policy you have as well as your age, lifestyle, health, and how much cover you need.
Why Do I Need It?
If you are a single person with no dependents, then Life Insurance might not be a pressing priority to you, but if you have a joint mortgage with a partner, or you have young children, then taking out Life Insurance is much more important.
Why is Life Insurance important?
Well if you were to die, how long could your family or partner survive without your income? Research tells us that in situations where a household wage-earner dies – even if they weren’t the sole breadwinner – within 3 months the surviving family members will start to feel the effects, with bills mounting and the added cost of things such as childcare.
Now imagine how much sooner your family might start to experience financial hardship if you were the only breadwinner. Could the surviving parent find a job with a comparable wage? Can they afford to pay a childminder or fund after school clubs in order to accommodate the fact that they now have to work? Can they earn enough to cover the mortgage, utilities, groceries, clothes, birthdays, christmas…. When it comes to children the list of needs and wants are never ending – and it only gets more expensive as they get older!
I’m not trying to tug on your heartstrings here, but in all seriousness, why add financial problems to an already stressful and heartbreaking time by not taking out Life Insurance?
I’ve convinced you? Good.
Are There Different Types Of Life Insurance?
In a word, yes….but before you throw your hands up and say, ‘Oh this is too complicated, I’ll sort it out tomorrow’, I’m here to tell you that it’s a good thing you have some choice when it comes to which type of policy to take out. Everyone’s life and circumstances are different, so it makes sense that there isn’t a ‘one size fits all’ mentality when it comes to Life Insurance; instead you can choose the policy that suits you best.
Term Life Insurance
This is the most basic type of Life Insurance. You choose the amount you want to be insured for and how long for (25 years for example). If you die during that chosen time period the policy pays out the amount you are insured for to your family. If you don’t die during the term of the policy then there is no payout and the premiums you have paid are not returned to you.
Term Life Insurance can be broken down into 3 types (don’t panic, this is the only type of Life Insurance that does this)
- Level Term – This type of insurance pays out a cash lump sum if you die within the chosen term, and the amount you are covered for stays the same throughout your policy.
- Decreasing Term – With this type of Life Insurance the amount of money you are covered for decreases over time and is often used to cover a debt that decreases over time – such as a repayment mortgage.
- Increasing Term – Yep, you’ve guessed it; this time around the amount you’re covered for increases over the term of the policy. This is so that the amount received keeps up with inflation and if you were to die your family could make the most of the payment.
Whole Of Life Insurance
As you would expect from the name, Whole Of Life Insurance policies cover you indefinitely rather than over a set period of time. No matter when you die – your family will receive a payout. Because insurance companies know that at some point a claim will be made on a Whole Of Life Insurance policy, the monthly premiums are more expensive than Term Life Insurance.
Family Income Benefit
This type of Life Insurance is different in that it doesn’t pay out a one-off lump sum amount if you die. Instead, your family will be paid a regular income over a set period.
Managing a big amount of money can be complicated and a bit stressful at the best of times, and if your family is grieving it could all be too much to handle. Family Income Benefit will make budgeting for the monthly expenses much easier, and because you choose the length of the policy you can make sure that the monthly income lasts for as long as you want it to – maybe until you plan to retire, or until a time when you expect the children to be financially independent.
Of course with this type of insurance policy, paying off the mortgage in one go after you have died isn’t an option and so the monthly mortgage payments would have to be made out of the monthly insurance payouts. It also means that any future decisions regarding remortgaging or selling the house will fall to your partner when the time comes.
How Much Does Life Insurance Cost?
As I briefly mentioned, your monthly premiums will depend on your policy type; Whole Of Life Insurance is more expensive for example, whereas Family Income Benefit is one of the cheapest types of policy – and this is generally because of the amount of money paid out and how long the term of the policy is.
Your health and lifestyle also play a big part when it comes to how much you’re going to be paying per month. You probably won’t be surprised to learn that if you’re a gym-bunny who hasn’t touched processed food in 20 years you’re going to be paying a lot less than if you’re reading this article with a large donner and chips on your lap and a fag on the go.
When it comes to applying for your Insurance Policy it’s important that you answer all the questions about health and lifestyle honestly. It might be tempting not to mention the fact that you smoke twenty a day or have a family history of heart disease in order to save a few quid on your monthly premiums; but, if you were to die of a smoking related illness or of heart disease and the insurance company find out (which they definitely will by the way), then your family won’t receive a pay out, and all those years of premiums would have been for nothing.
How Do I Find The Best Policy For Me?
A lot of people’s first port of call when it comes to buying any type of insurance is to check out an online price comparison site; it’s quick, easy, and you can do it in your pyjamas at 2am if you want to. Now, I’m not saying that this is a bad way to buy Life Insurance – I’m saying it’s a terrible way. The trouble with price comparison sites is that while on the surface of it an insurer might offer you a very low premium, unless you apply directly and give them all your info you won’t really know what your premiums will be – and if you’re going to do that to every company on the list it’s going to be a pretty time-consuming way to find the cheapest deal.
Another problem with price comparison sites is that they don’t necessarily list every insurer out there, so you could be missing out on a policy that’s the ideal fit for you and your family simply because the company doesn’t want to pay a registration fee to be represented by a couple of meerkats.
Your best bet is always going to be to go to an independent advisor, such as myself – and I’m not just saying that! For one we offer free advice, but most importantly we do all the legwork for you – like a real-life price comparison site (we probably won’t even really mind if you talk to us in your pyjamas). We also have access to insurers that aren’t on comparison sites and can even get you a better deal with the ones that are, because they won’t be upping the premiums in order to recoup any fees they’ve paid to sign up…leaving you free to look up more interesting things on the internet.
If you have any other questions about taking out Life Insurance and finding the best policy to protect your family, then please get in touch. You may also find some of my other articles interesting.