Should I take out life insurance?
Death isn’t the cheeriest subject to talk about. But taking out a life insurance policy in case of your early unexpected demise could financially shield your loved ones when you’re gone, so it’s worth at least considering.
Here’s what you need to know about life insurance, including whether you need to take it out and the sort of policy you might choose.
What is life insurance?
The most common form of life insurance (or life cover) pays out a tax-free sum to your loved ones if you die within a certain period of time. This period is also known as the ‘term’. It crops up a lot in relation to life cover, which is why you might also hear this product referred to as ‘term insurance’.
Money paid out from a life insurance policy is known as the ‘sum insured’. This amount is decided at the time of taking out a policy. Your ‘premiums’ are then used to pay for the policy on either a monthly or annual basis. These will increase given the greater the size of the sum insured and also the longer the term is set to last.
If you’re still alive at the end of a policy’s term, the insurance terminates and has no value beyond this point. The policy also ends if you just stop paying the premiums, again with no value attached to it.
Another form of life cover is known as ‘whole life’ or ‘whole of life’ insurance. This differs from term insurance because a whole life policy will pay out whenever you die. That extra flexibility makes it a more expensive form of cover to buy.
Whole life is often regarded more of an investment and tax-planning product than a straightforward means of providing money for your loved ones in the event of your sudden demise.
Term life cover is available via comparison sites and is offered by banks, building societies, insurance companies and even some retailers.
Do I need life insurance?
The answer to this question revolves around whether or not you have people who are financially dependent on you, such as a spouse, partner, of children (or a combination of these).
If, say, your spouse and two children rely on you financially, then taking out life cover at least means they would be provided for in the event of your death. You may, for example, be your family’s main breadwinner in which case a pay-out would financially compensate loved ones were your income to stop.
Even if you’re not a breadwinner but, say, look after the home and the family while your partner works, then it’s worth asking what the financial impact would be if you weren’t around anymore. A life insurance pay-out could pay for the support required to cover your absence.
If you’re single, however, and with no dependents then the case for taking out life insurance is less obvious.
The proceeds from life insurance policies are paid to ‘beneficiaries’ who are named at the time a policy is taken out.
Beneficiaries can spend the cash from a life policy as they see fit. Typically, the money might be used to pay off a home loan.
Most mortgage lenders require customers to take out a life insurance policy as a requirement of their home loan. That said, you’re not obliged to take out the policy that they offer you.
But pay-outs can also be used to clear outstanding debts from credit card balances and other loans, or to meet future or ongoing expenses, such as bills or tuition fees.
Should you wish to, there’s nothing to stop an individual taking out several different life insurance policies at the same time.
Terms of reference
There are three versions of term life insurance with each one working slightly differently.
In the case of ‘level’ term insurance, the pay-out stays the same regardless of when a claim is made during the policy’s term. Would-be beneficiaries know exactly how much they’ll be entitled to at any time and policy premiums remain the same for the duration as well.
In contrast, ‘decreasing’ term insurance sees the pay-out decrease over the term of the policy. This form of cover makes sense if the main debt that’s been lined up to pay off is a home loan, such as a repayment mortgage, because this also reduces over time.
Premiums on decreasing term insurance will stay the same over the policy’s duration but should work out cheaper overall than those for comparable level term cover.
The third version is ‘increasing’ term insurance where the policy pay-out rises over time. This protects the cover you’ve agreed against inflation such as that measured by the Retail Prices Index, for example, or by an additional fixed amount each year.
To pay for this benefit, premiums are typically more expensive for increasing term insurance compared with the other two products.
A couple may decide to buy two separate term insurance policies to protect each other as well as, say, their children.
A second option is for them to buy a ‘joint life’ policy which can work out cheaper, in terms of the overall cost of premiums, but only because it pays out on the first death.
With a joint policy, if the remaining party wanted to take out a new plan, it would be dearer for them to do so because that person would be older than when they took out the original cover.
When choosing the term on a life insurance policy, an important consideration is for what purpose the cover is being taken out. If the aim is to pay off a mortgage, for example, then the term needs to last as long as the remaining amount of time that’s outstanding on the home loan.
In contrast, you may decide you only need cover for the time that your children, or other loved ones, will depend financially on you. Or you may just require cover up until your retirement age.
What affects the price of term insurance?
Premium depend on several variables relating to the policyholder. These include:
Health (along with that of immediate blood relatives)
Term of the policy
Amount of cover required
Premiums rise with age, health problems and if you are a heavy smoker. Taking out life insurance may require you to fill in a medical questionnaire or undergo a health check.
The older you are when taking out life insurance, the more chance there is that you’ll have health issues which in turn forces up the price of cover. If you term insurance finished and you wanted a new policy, premiums would probably cost a whole lot more.
Some insurers, there, offer so-called ‘renewable’ term policies allowing you to renew your cover but without an updated health check. For example, reaching the end of a renewable 15-year term plan would allow you to continue with cover at the same level as the original policy.
How to get a good deal
An online comparison tool will show you the prices from a range of insurance providers for the cover you need. Weigh up closely the merits of different policies.
Rather than focusing solely on price, the important thing to bear in mind is to choose the cover that best suits your particular needs.
Alternative to life cover
Those on the hunt for a different means of supporting loved ones financially might instead look at family income benefit. Rather than provide a cash lump sum, this pays out a monthly tax-free income to your family if you die within the policy term.
If the cost of life insurance is a concern, family income benefit can be a more affordable option. Dealing with a regular income can also be easier than trying to manage a heftier, one-off lump sum.