Life insurance is cheap – costing just a few pounds a month – but if disaster strikes it could be the most important financial product you will ever buy for the continued well-being of your family.
No-one likes to think such insurance will ever be needed, but what would happen to your family if the worst happened. Would they have enough money to carry on living without you?
The Association of British Insurers say that in 2013 – the latest figures available – more than 25,000 people claimed a total of £1.3 billion on the most basic form of life insurance. This is an average payout of £51,500.
Adding in the most complex policies like those which pay out when someone is critically or terminally ill, the numbers jump sharply to 86,000 policies which paid out almost £3 billion.
One of the first questions you need to answer when considering taking out a policy is how much cover you actually need. There’s lots to take into consideration. Obviously, you will want your mortgage to be covered, but what about school or university fees?
Even if the surviving spouse works, will there be enough money coming in to make sure there will be enough money for their needs? Will they have to cut down their own hours to look after the kids or is it going to cost them more for child care?
When you’ve worked out how much you need your insurance to pay out you need to decide what type of insurance best suits your circumstances – level term, decreasing term or a mix of both?
Level term insurance will cover you for a fixed amount of money, over a fixed period of time with a fixed premium. It will pay out if you die, but if you survive past the end of the term for the policy you will get nothing.
Decreasing term reduces the amount of cover over a period of time and is ideally suited to cover the cost of your mortgage. It’s also a little cheaper than level term.
What type of payout?
If your policy is set up to pay out a lump sum you will have the additional problem of how to invest the payout to give you the income you require for the coming years. A lump sum of £200,000 would yield £10,000 a year in income for about 30 years if your investment paid a constant 3%.
Or you could set it up with Family Income Benefit (FIB) which pays a regular income until a specific date – for example when your youngest child reaches 21. Figures and policies vary, but a 30 year old choosing a policy with built-in inflation protection to pay out £2,000 a month for 30 years could expect to pay between £15 and £20 a month.
Single or joint?
Joint policies can work out cheaper than two single ones, but the key thing for young families is to make sure the policy pays out when the first person dies. With joint policies, if you both die your children would get just one payment, but with separate policies they would get two.
Whole of life policies – usually advertised as over 50s plans – don’t run for a specified period, they pay out when you die. They are popular with the older generation because they do not require a medical before they can be taken out.
There are all kinds of added extras available on life policies. Most will pay out if you develop a terminal illness and the healthy partner is forced to cut down on their hours of work or even quit altogether.
Others allow the addition of critical illness cover which pay out on severe, but not necessarily fatal, illnesses and conditions like cancer or a heart attack. Or you might consider index-linked life insurance where your monthly premiums and the payout rise with inflation.