When you talk about life insurance, you are looking for a cover to offer solid financial protection for your family after you death. It is important to do a thorough homework before signing up any policy, so that you can get the most appropriate cover and best value deal.
Life Insurance Cover for What?
Before you finalize a policy, you should know what kind of cover you are looking for:
- A life insurance policy could help your family to pay off the mortgage after your death.
- A life insurance policy could help your children while they are growing.
- A life insurance policy could provide inheritance to your surviving relatives when you die.
- A life insurance policy could provide a lump sum amount to your family to assist your funeral.
How much cover should you take out?
In general, the more protection your life insurance policy offers, the higher your premiums.
If you’re over 50 and your main concern is leaving an inheritance, or helping your family cover funeral costs, the cover may depend more on what you can afford to pay in premiums.
How long should the policy last?
When you buy life cover, it can last either for a fixed period or for the rest of your life.
A policy that lasts for a fixed time period is known as term.
If you only want cover for your mortgage — which will typically last 25 years — or to give your family a financial safety net, then term insurance is usually more appropriate.
If you’re planning on going strong and outliving everyone, great for you.
However, the downside to term insurance is that, if you live longer than the policy term there’s no payout, so it might be worth looking at a different type of policy.
If, on the other hand, you want the policy to provide an inheritance, whole-of-life insurance could be a better bet.
Should the level of insurance change over time?
If you’re covering your mortgage, the amount you owe will fall as you make monthly repayments.
So it makes sense that the scale of your life cover reduces in line with the loan.
This is known as decreasing term insurance. Premiums tend to be lower than level term insurance, which stay fixed throughout the term of the policy.
Should you get cover for your partner too?
Traditionally, the main earner in a family would take out life cover. However, if the partner earn less or they’re a stay-at-home parent, there could still be a financial impact if they died.
Also, if you have children you may need to think about costs for child care or domestic work.
If both partners want cover, you can either buy joint life insurance or two separate policies. Joint cover only pays out on the first death, after which the policy ends.
Separate policies would usually pay out when either partner died, offering a higher level of protection.
What other factors affect the cost of life insurance?
As well as the scope of cover and how long it lasts, there are a number of issues that can impact the size of your premiums, including:
- Your age
- Your health
- Your lifestyle
- Your family medical history
Hazardous jobs and hobbies might also affect the size of your premiums. If you’re a pilot or enjoy mountain climbing, then you might see your prices go up.
Saving tax and hassle
One more thing to consider is writing your life insurance policy in trust.
This means your family may be able to get hold of any payout with the least hassle and the lowest possible tax charge when you die.
Writing your life insurance policy in trust means the cover is ring-fenced outside of the rest of your assets, such as savings, investments and property.
Payments from the policy are not usually included in your estate for inheritance tax purposes.