Do I need a life insurance policy and how much cover do I need?

How would your family cope financially if you were to die? Its not a question we like to think about but it is a necessary one to consider. Life Insurance policies pay out when you die and the aim is to provide financial support to those you leave behind when the loss of your income could cause a monetary crisis for your family.

Every parent, partner or person with dependents needs to consider whether they need a life insurance policy, and although you don’t have to have life insurance, if you support anyone who will struggle without your income to pay bills, the mortgage, buy food or bring up children then it may be a financial lifeline for them when you die.

Of course, if you have no-one dependent on you, or no-one who would benefit from the money, then you may not need to purchase any life insurance. So the first thing to work out is if you need life insurance and what costs you need to cover.

I have death-in-service cover with my employer - will that not do?

This type of cover pays out a multiple of your salary, often about four times. However this is only valid whilst you are an employee and if you get made redundant or change employment then it may not be offered to you by your next employer. You should also consider whether the potential payout would cover all your costs.

It is also worth considering that if you do need life insurance it is best to buy it sooner rather than later, as the older you become the more expensive the life cover and even though the term might be shorter, premiums are generally much cheaper for younger people.

How much life cover do I need?

When you are considering how much cover you need it is worth thinking about the following:

-        Are you single, married, in a civil partnership or co-habiting?

-        How many dependents do you have, is it just your partner?, do you have children and how old are they? maybe elderly relatives?

-        Do you have a mortgage?

-        Do you have other debts that will need paying off?

-        Might your estate be subject to inheritance tax and would a life policy help to pay this?

-        What do your dependents need for immediate outgoings?

-        Do you have any future spending forecast – for example, university costs for children?

Covering your mortgage

It is not essential to take out life insurance when you buy a home with a mortgage, because in reality, the mortgage company can sell the property to recoup the loan, but a life policy would ensure that the mortgage is paid off and your family are not left without a home.

Typically, the length of a life policy is set for the same term as your mortgage, and there are two types of policy:

Decreasing Term Life Insurance – the premium and pay-out decrease in line with your mortgage term and balance. This is a cost effective option if you only want your mortgage paid on your death.

Level Term Life Insurance – when the premium and pay-out remains the same for the fixed term of the policy. This might be used for an interest only mortgage.

Covering your other costs

If your policy is covering children and their costs then it should last until they are no longer reliant on you; this is generally considered to be when they finish full time education. Of course you also need to consider how much you can afford and it is best to speak to a life insurance adviser who is able to find the most cost effective policies to cover your unique situation.

Is Critical illness cover the same as life insurance?

Critical illness cover is a common addition to life insurance policies, but it is worth understanding what conditions and illnesses the policy will cover, as not every illness will be covered, for example losing one arm may not be considered critical but losing two is. As with life assurance it is worth speaking to a life insurance adviser as there are many options and it is essential to find the best one for your situation.

Are there any other life policies I should consider?

Whole of Life Insurance

This is exactly what it says – you are insured for the whole of your life, and your family will receive a lump sum when you die. The coverage is set at the start and as long as the premiums are paid, that amount is paid out on your death.

Family Income Benefit

This policy assures an annual tax-free payment for the length of the policy term. For example £12,000 a year for 10 years. If you die 4 years into the policy, your dependents would receive £12,000 for each of the remailing 6 years.  

This type of policy tends to be cheaper as the amount it pays out reduces over time.

 Of course, our lives changes, we might move house, start a family, change jobs or consider retirement so it is worth reviewing your life insurance periodically.

 If you would like to discuss life insurance or any other financial matters, we will be happy to help. Please contact us without obligation.

Established in Berkshire in 2004, J Finance Ltd is one of the leading financial planning companies in the area. We serve clients across the whole of the country. If you would like to discuss this subject or any other financial matter, please contact us.

YOUR MORTGAGE IS SECURED ON YOUR HOME, WHICH YOU COULD LOSE IF YOUDO NOT KEEP UP YOUR MORTGAGE REPAYMENTS.