We’ve been asked a lot of questions about Life Insurance recently and coming up a lot seems to be “Do I need Life Insurance?” and “Is Life Insurance worth it?”
There are lots of different types of Life Insurance but the amount of cover and the type of policy you choose depends primarily on the reason you need Life Insurance. Firstly, no-one should ever take out a Life Insurance policy simply because they are worried about getting sick or because they are looking to make money. Standard Life Insurance is not an investment or a cash windfall, it is designed like any insurance to try and ensure that when something bad happens it doesn’t also hit you or your family financially.
A terribly sad fact is that 1 in 29 children will lose a parent before they grow up. This of course brings unimaginable grief and distress to any family, but it also brings financial consequences. If a parent works and brings in an income, if they are no longer around, this income will stop. If another parent looks after the children and they die, there will be either increased childcare costs or a loss of income to accompany the grief.
There is no personal benefit from taking out Life Insurance. Your £20 per month won’t put a shiny new TV in your living room. It simply gives you peace of mind that should the worst happen you have protected the people who matter to you. That if something terrible happens, at least your loved ones won’t have to worry about paying the rent or the mortgage and putting food on the table.
Types of Cover
Essentially there are 3 main types of Life Insurance, each one is designed for the different reasons you might need Life Insurance.
- Level Term Life Insurance – Very simply, you choose the sum assured and the term. If you die during the term the policy pays out, if you don’t die it doesn’t pay out.
- Mortgage Decreasing Protection – Designed to repay your repayment mortgage if you die so your loved ones don’t have to pay the mortgage.
- Whole of Life Insurance – Typically 4 times the cost of Level Term Life Insurance. There is no term so this is usually used for funeral expenses or Inheritance Tax planning.
Level Term is cost effective, and so is the most popular form of Life Insurance in the UK. With Level Term Life Insurance, a question we get asked a lot is “so if I take £200,000 out over 25 years and I’m still alive then I’ve wasted my money?”
What’s in it for me?
Life Insurance is a selfless act. It is also one thing you will buy and hope you will never claim on, you hope it will be money for nothing. It’s not designed so you get £200,000, it is not an investment, and if it was it would cost an awful lot more than it does. The point is, if you are 40 years old and your youngest child is 5 years old, in 25 years time you will be 65 years old and your youngest child will be 30 years old. The reason you take out Life Insurance when you are 40 years old with young children is very different to the reason you might take out Life Insurance at 65 with no dependent children. As such the amount of cover and type of policy you need will also very likely be different.
The aim of Life Insurance is to have enough cash to cover the lack of income if you’re gone. So if you’ve no partner or children who need the money then you probably don’t need Life Insurance.
If you do have a partner or children, it’s important to consider the financial impact if you died.
You would be looking for a lump sum that’s enough to repay any outstanding debt (including a mortgage if you don’t have a separate policy), and provide for outgoings your dependants would have in future years.
The term time has less of an impact on the cost of the policy than the sum assured, but generally the longer the term the more the cover costs. Some people still fall into the trap of thinking they should maximise the chances of the policy paying out and looking for a 40 or 50 year term. This pushes the cost right up, and for many people means you are paying a lot more money now, to protect your children when they are in their 40s or 50s and you have long since retired. Instead, consider at what age your children will no longer be financially dependent upon you, possibly after full time education will have finished for example. Doing this will keep the cost down and ensure your policy protects what it needs to. You can always look at a funeral expenses or funeral plan policy when the term policy finishes. Again, with Term Life Insurance, your main hope should be you will never claim on it as that will mean you have lived to see your children grow up. Sadly, not all parents have this luxury.
Those who’ve had serious medical conditions, have a high BMI, and smokers, often pay more for cover. If you already have life insurance and have been nicotine free (including e-cigarettes and patches), it could be worth seeing if a new policy would be cheaper. The same applies if you took out cover a few years ago when you were overweight or had a poorly controlled health condition which has now improved.
Will it pay out?
The great thing about Life Insurance is its simplicity. There isn’t going to be an argument with an insurance company like you may get on other policies. Was your 70 inch TV really stolen or or is it just stashed in the attic? If you’re dead, you’re dead so that won’t be disputed. With a couple of exceptions from new insurers, Life Insurance providers don’t have any exclusions apart from suicide in the first 12 months of the policy and not answering the questions truthfully. As a result most Life Insurers report claims acceptance rates of between 98% and 99%.
So if you have people who rely on you financially or who rely on you for care, you probably want to make sure you have some Life Insurance. For most people it costs a lot less than they think. At www.saveonlife.co.uk you can quickly compare leading providers and as you probably have more exciting things to be doing than answering 50 medical questions, they also have a policy that allows you to get up to £250,000 of cover by answering just 5 questions. It is a really fast way to protect your family, score this one off the list and get back to enjoying life.