Life insurance – it’s a bit of a conversation stopper.
After all, making plans for when you die isn’t only a tad morbid, it can feel a touch too much like tempting fate. And, let’s face it, it’s also just quite boring and, like many other insurance products, getting your head around it feels overly complicated – so it’s often just simpler to ignore it.
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But choosing life insurance shouldn’t have to be like that. So, in plain English, here’s what to think about when deciding which policy to choose.
Should I bother with life insurance?
It’s ironic that while life insurance covers your life, it’s not actually about you at all – it’s about ensuring that those you leave behind are financially secure.
Policies pay out when you pass away, providing your loved ones with a financial settlement that they can use for a variety of reasons, like paying off the mortgage.
While few of us enjoy contemplating our own mortality, life insurance can offer the peace of mind of knowing that bills can be paid and life can go on as best it can for your family, particularly if you’re the breadwinner. On the other hand, if you don’t have dependants or your partner earns enough to cover costs without your input, then you may not need life insurance.
What types of policies are there?
There are two main policy types to choose from:
Term cover – these policies only cover you for a set amount of time (the ‘term’). If you die within the policy term, your beneficiaries will receive a payout; if you die after the policy ends, they won’t receive anything.
There are three types of term cover policy to choose from:
- Level term – the payout remains fixed throughout the term. So, if you take out a policy for £50,000 over 25 years, it doesn’t matter whether you die one year or 24 years after you take out the policy: the settlement will always be £50,000.
- Decreasing term – the payout will get smaller over time. These are sometimes called mortgage life insurance policies, as the settlement is designed to decrease in line with your mortgage repayments. One benefit is that your premiums shrink as the years go by – a good option if your mortgage is the main reason for taking out life insurance.
- Increasing term – (you’ve guessed it) the payout will increase over time to keep up with inflation. You can link policies to either the retail price index or the consumer price index to match the cost of living, or choose to increase the payout by a set percentage each year. Just bear in mind that your premiums are likely to rise each year too.
Whole of life cover – this type of policy does exactly what it says on the tin and covers you for the entirety of your life, so your beneficiaries will receive a payment whether you shuffle off at 99 or 109. Typically, whole of life policies are more expensive than term policies, but they do offer dependants a guaranteed payout (in line with any terms and conditions, of course).
Choosing the term
Think about why you want life insurance in the first place. For example, a decreasing term insurance policy aimed at covering outstanding mortgage payments should be for the same term as the mortgage loan itself, while families with very young children might need to think about when those kids are likely to become financially independent and choose a term accordingly.
Choosing the level of cover
Again, this depends on your own circumstances and how you envisage the money being spent. A very general rule of thumb that’s often touted is to choose an amount that is ten times the main earner’s salary – so, if their annual salary is £20,000, the level of cover should be £200,000.
Joint policies cover two people but, crucially, only pay out once – and it’s up to you and your fellow policyholder to decide on whose death the policy pays out.
As unromantic as it is to think about the demise of your life partner, it is important to understand the consequences of the choice made. Paying out on the first death means leaving the remaining partner without life insurance, which could have repercussions for other dependants, while delaying payment until the second death could mean financial hardship.
Joint policies are also very difficult to unpick – so if you split up, it’s unlikely you’ll be able to separate your policy as easily as your lives.
Guaranteed versus reviewable premiums
With guaranteed premiums, you pay a fixed amount every month for the length of the whole policy, whereas reviewable premiums fluctuate.
Guaranteed premiums often look quite expensive to start with, but may seem less so over time. As reviewable premiums are at the discretion of your insurer, what you pay could increase significantly as the policy matures and cost more than the monthly guaranteed premiums. In some cases you might even end up paying more over the life of the policy if you have a reviewable premium compared to a policy for a fixed, guaranteed premium.
Know your needs
Life insurance is as unique as you, and it’s vital to think about your own needs and expenses.
Whatever you opt for, it’s worth considering putting your life insurance policy in trust to ensure beneficiaries don’t pay inheritance tax on the payout. Your insurance provider or broker should be able to do this for you at no extra charge when you take out a policy, or you can ask a solicitor.