Did you know that just 30% of people in the UK have life insurance?
This alarming figure means that, according to Finder, 8.5 million people don’t have any life cover. Even those people with a mortgage aren’t always covered, with almost half of mortgage holders (42%) having no life insurance in place.
Life insurance can give you the peace of mind that your family and dependents are protected in the event of your death. In your complete guide, we look at why you might need protection and examine the various types of cover available.
Why you might need life insurance
How would your family be able to cope if you passed away? Would they have enough income to continue living in your family home? Could they pay the mortgage or rent, as well as all your monthly bills?
New research from Sainsbury’s Bank has revealed that it is major life events that often prompt people to buy protection products. The survey found that:
- 34% of people chose to buy life insurance when they bought a house
- 17% purchase life cover when they had a child
- 12% bought cover when they got married
Karen Hogg, Head of Insurance at Sainsbury’s Bank, said: “Our research found that people are more likely to worry about the financial implications of their passing rather than taking action to alleviate any concerns and protect themselves for the future.
“Taking out a life insurance policy can help give you peace of mind and ensures you have the financial protection in place.”
So, what types of life insurance are available?
Level Term Assurance
Level Term Assurance is a simple type of policy that pays out a fixed amount if you die within a specific term. For example, you could take £100,000 of cover over a 20-year term, and the policy would pay that sum whether you died in year one or year 19.
The amount you are covered for always remains the same, so this type of insurance has typically been used in relation to an interest-only mortgage (where the balance doesn’t reduce every month) and for family protection where you want to ensure your beneficiaries receive a guaranteed lump sum if you were to die within the term.
You would typically choose a term that matches your mortgage (to protect a debt) or until you expect your child to become financially independent.
Remember that Level Term Assurance covers your life for a specific term. Once that term comes to an end, you no longer have any cover in place. So, if you die a year after the policy finishes, there will be no payout.
Decreasing Term Assurance
As the name suggests, with a Decreasing Term Assurance policy the sum assured reduces over the term of the cover. You might decide to take £100,000 of cover over a 25-year term, and if you died in the early months of the policy it would typically pay the full amount. If you died in year 24 of the policy, it would pay a much lower amount.
This type of cover is most often used to protect a reducing debt, such as a capital and interest (repayment) mortgage or a potential Inheritance Tax liability.
As the payout falls over time, Decreasing Term Assurance is generally the cheapest type of life cover that you can buy.
Family Income Benefit
Family Income Benefit is another type of term assurance that protects you for a fixed period of time. Unlike Decreasing or Level Term Assurance, however, it pays a regular income on death rather than a lump sum.
For example, you might choose to cover yourself for a 20-year term. If you died after 15 years, the policy would pay out a regular income for the remaining five years of the policy.
Family Income Benefit can be useful if you want to ensure your family receive a regular income to pay rent, bills or other expenses. As the name suggests, it’s also popular with people who have young families that they want to support in the event of their death.
Whole of Life Cover
Whole of Life cover is designed to pay out a lump sum on your death – whenever that occurs. Unlike a term assurance policy, there is no fixed term and so the policy will run until you die.
A Whole of Life can be useful to cover a potential Inheritance Tax liability on your death. If you take out a Whole of Life policy and write it under trust, your beneficiaries should receive a tax-free lump sum, which they can use to pay any Inheritance Tax bill that is due.
As a Whole of Life policy will always pay out at some point in the future, they are generally more expensive than term assurance policies.
In addition, most insurers will guarantee your premiums for the first ten years and then review your plan. Often, premiums will rise at this point and this takes many people by surprise. Indeed, Which? reports that the biggest complaint about Whole of life cover is that people didn’t know their premiums would be reviewed, according to the Financial Ombudsman.
Choosing the right cover for you
With various types of life insurance available, it’s important to get the right protection for you and your family.
Mike Preston, the Business Development Director at comparison website Compare Cover, says: “Losing a partner is life-changing and devastating. You have not only lost part of your family but, thinking practically, you have also lost a member of your family team and someone who may have contributed financially to your household.
“That’s one of the reasons why it is increasingly important for people to consider protecting their family’s future finances by taking out life insurance.”
When you look for life insurance, cost may be a factor. Your premiums will be affected by:
- The amount of cover you want
- Your age
- Your health and medical history
- Whether you smoke or drink
- The term (for term assurance)
You’ll also need to decide whether you want to take out a joint life policy or cover in individual names.
A joint-life policy will typically pay out on the death of the first life and then cease. There will not normally be a second payout on the death of the other person insured. This means that a joint-life policy will typically be cheaper than each person buying an individual policy.
However, if your relationship ends there is no way to divide your joint-life policy into separate policies. You may have to cancel your cover and take out new protection, which could well be more expensive as you’re older.
If you each take individual policies, then you can retain your protection if you separate. And, if you each had a policy and you died at the same time, both policies would pay out (unlike a joint-life policy where there would be just one payout).
Get the right cover for you
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