Is it worth it? Who should buy it? What cover should I get? Just a few of the many questions that pop-up when we’re talking to clients about life insurance cover.
For many people, it’s something they’d prefer not to think about too much or, even if they do, perhaps see it as a waste of money and something they will never need. As part of our One Life campaign, we look at some of the key issues and potential benefits.
What is life insurance?
Life insurance is designed to provide a vital service – to help your dependents cope financially should you die. Even if you prefer not to think about this prospect, it can be very reassuring to know this cover is in place should the worst happen.
Who should buy?
Taking out life insurance is more to do with the stage of life you’re at and your personal circumstances than it is to do with your age.
A key question to ask is ‘what would happen to the people around me if I died?’ If the answer is that the financial impact would be minimal, you probably don’t need a policy. But if paying the bills, the mortgage, bringing up the kids and picking up the shopping would be more of a struggle; this is a cheap way to solve that.
Many people choose to take out a policy when they start a family, or when they buy their first property and want to make sure they would not leave significant debts behind for their loved ones to deal with.
For some people it can be an unnecessary cost – for example a young person, renting a property with no dependents. Someone in this situation might be more concerned with what would happen to them if they were ill and couldn’t work through ill health. Income protection might be more relevant in this case.
The key thing is to continually review your life insurance cover as your circumstances change as you may need more or less cover. For example, if your children are older and have left home and paid off the mortgage you may well need less cover than previously.
What type of life insurance is available?
There are two basic types of life insurance – term and whole-of-life cover – but many variations within these categories.
Term policies are the simplest and most straightforward. Often taken out at the same time as a mortgage, they pay out a lump sum if you die within a specified period, although you get nothing if you are still alive at the end of the term.
There are several types of term assurance including level term. This means that your dependents would get the same pay-out whenever you died after taking out the policy. Other common types are decreasing term assurance, where the pay-out decreases by a set amount each year down to zero by the end of the policy, and increasing term assurance. Conversely, this increases the amount paid out each year – often to counter inflation.
In contrast, whole-of-life, as the name suggests, will guarantee a pay-out whenever you die. However, because you are certain to die while holding the policy, premiums are considerably higher. There are different types of whole-of-life policy, some offer a set pay-out from the start, while others are linked to investments.
What are the costs?
Existing health conditions and whether you smoke or not will make a difference to the premiums you will pay. Age is another key factor. On a 15-year, level term policy with £100,000 payable on the death of the policyholder, monthly premiums for a non-smoker would cost about £6.00 at 28 years old. This would rise to £9 at 40 years.
If you take out a term assurance policy set to end at the age of 60, a 28-year-old with a 32-year term would pay around £7 a month (or a total cost over the term of £2,741.76). A 38-year-old would pay £9.53 a month and a 48-year-old would pay £16.17 a month or £2,328.48 over the 12-year term – a similar total amount but for 10 years’ less cover.
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