Life Insurance Guide

Life insurance provides financial security for your family if you die. A monthly premium will ensure that your debts are paid off or a monthly payment to your family (known as the ‘sum assured’).

The cost of an individual premium depends on factors such as your age, current health and the length of the policy you want to take out. The more likely you are to die then the higher the premium is likely to be.  

Who should get life insurance?
Those applying for mortgages that have partners or children will be asked to take out a life insurance policy.  Though not a legal requirement it means your mortgage will be paid in the unfortunate event of your death.

If you are unsure how your family or dependants may cope financially after you have passed away, then you should look closely at life insurance. Single people do not normally need life insurance except where children are concerned, in which case this may be suitable.

YourHomeBills.com recommends you consider life insurance where:

• you are married and your spouse may need financial support

• you have children and they need financial support should you die

• you have retired and, when you die, your family needs to cover the cost of the funeral expenses. These policies are paid out immediately and will help to offset the financial burden without the need to use other sources of finance such as the house or other assets.

What kind of life insurance cover should I get?
As there are many different types of life insurance policy, you should spend some time researching their differences before committing to one. In some circumstances you may even need to take out more than one policy with one covering your mortgage and another to provide for your family in the event of your death.

The amount that you wish to have paid out when you die is up to you and can be set during your application. Certain life insurance policies will reduce over time as your mortgage and other financial debts are reduced. It is all very well trying to find the cheapest life insurance policy on the market but it is highly recommended that you choose the right policy to cover your needs.

The main types of insurance policy are:

• Level term insurance

• Critical illness insurance

• Mortgage protection insurance

• Decreasing term life insurance

• Family income benefit insurance

• Whole of life insurance

How much life insurance do I need?
Most people choose to buy insurance based on replacing their income.  For instance, a figure of around 5-10 time your annual salary is generally used to calculate how much financial cover you need.  Alternatively you could opt for covering just your individual needs.

Currently, a large portion of anyone’s income goes to taxes and to support your family and lifestyle. It is worth adding up all your personal expenses such as clothing, food, memberships, transport, subscription services that you use. Anything that is left after deducting this from you annual income will equate to the amount that your insurance will need to replace. Of particular note is the death benefit amount, which will provide an income annually to cover the remaining shortfall. 

You then need to add the combined amount of one-off charges that are anticipated for your family as they get older; this may include paying off mortgages, loans or university fees. 

Another important aspect of the life insurance cover is income replacement for non-working spouses such as your day care, general housekeeping and perhaps even your nursing care. There may also be the need to cover those expenses such as uninsured medical fees, funeral costs and estate tax.

Types of life insurance policy
Two types of policy exist; ‘term life insurance’ and ‘permanent life insurance’.  The majority of life insurance policies are ‘term life insurance’ by which we mean setting a policy for a set term. ‘Permanent life insurance’ is generally more expensive.

Level term life insurance: You pay a premium for a specified number of years and if you die before the policy ends, your family will receive a lump sum. This sum does not change during the course of the policy

.Mortgage protection life insurance: You pay a premium for a specified number of years and if you die before the policy ends, your family will receive a lump sum. This sum does not change during the course of the policy.

Decreasing term life insurance: This is similar to mortgage protection insurance, except that it is used to cover payments on all kinds of loans, not just mortgages. A lump sum is paid out if you die before completing your debt repayments. This sum decreases by a fixed amount during the period of the term and if you finish paying your debt, no sum is paid out.

Family income benefit insurance: This is similar to mortgage protection insurance, except that it is used to cover payments on all kinds of loans, not just mortgages. A lump sum is paid out if you die before completing your debt repayments. This sum decreases by a fixed amount during the period of the term and if you finish paying your debt, no sum is paid out.

Whole of life insurance: Whole of life insurance guarantees a payout on your death, however long you live. This is more costly than other policies where the policy term is fixed, but means that whenever you die, money will be paid to your dependants.

You may also wish to take out critical illness cover which, although often linked to life insurance, is different:

Critical illness insurance: If you are worried what would happen to your family if you were to get a critical illness, such as Multiple Sclerosis, then critical illness insurance will give them financial security. It will pay out a lump sum if you are diagnosed during the term of your policy. However, it only covers certain illnesses, and does now cover anyone who has previously been ill.

Other life insurance options
When you apply for a life insurance policy you will need to think about more than just what policy you need. These are the most important factors you will have to consider when filing out your application form.

Number of applicants: A joint life insurance policy with your partner will save you money. However, avoid policies that stop paying out after the first partner dies, and instead look for policies that treat each individual separately.

Waiver of premium: Where this option is offered, the insurance company agrees to cover your premium payouts if you become ill, or have an accident, which stops you working for more than six months. This does increase your premium payouts, but is worth considering.

Term of policy: As a rule it makes sense to have a policy that lasts until you retire, as after this point you should have separate financial provisions in place. However, mortgage protection life insurance should last as long as it will take to repay your debt.

Amount of cover: If you are taking out a policy that covers your mortgage or other loans, then the sum owed will reduce as these are paid off. However, if you are taking out a policy that will pay your family a lump sum or an income when you die, you need to realistically think how much money they would need to be financially stable.