Do you really need Life Insurance?
Many of us don’t wonder about what will happen to our money after we die. We won’t be around to spend it after all. Or because we are young and healthy, we believe we won’t have to worry about our death for many years yet and so, like with making a will, we delay thinking about it.
The quickest and easiest way to decide if you should start thinking about life insurance is this one simple question: “If I were to die tomorrow, how would this financially affect my family?”
Taking steps now might save your loved ones from financial difficulty in the future. Life insurance is a policy that can give your family or dependants financial security and for this reason, it is often called the most essential financial product you can buy.
We’ve put together a guide to help you decide if you personally should be looking at getting life insurance, depending on your circumstances or what stage you are at in your life. The guide is broken down into:
- Your household income
- Your family
- Where you are in life
After this, you should know more about how life insurance can benefit you and be able to make a more informed decision.
Your household income
I am the main breadwinner
If you are the main financial support for your household and were to pass away, life insurance may be crucial to your family being able to continue paying the mortgage or rent, grocery shopping, and other daily expenses. Term insurance is the most popular type of life insurance and you can cover your life for a certain period, for example, twenty years.
Most life insurance pays out a single tax-free lump sum but there is also the option of having the money go to your family in regular monthly payments as a salary would. This is called family income benefit.
I am a stay at home parent
You may be a stay-at-home parent and rely on your partner’s salary for financial stability. Likewise, your partner may rely on you for full-time childcare. If you were to pass away would your partner be able to financially cover the current household expenses and childcare? It may be worth getting a more affordable life insurance policy for yourself and one with a bigger pay-out for your partner.
My partner and I bring in the same amount of money
If you and your partner are both bringing in a salary, life insurance might not seem like a necessity. However, if your partner were to pass away, would your salary be enough to cover your mortgage or rent, daily expenses, and, if you have children, childcare? Would your partner be financially secure if you were to pass away?
You could get two single life insurance policies or there is also the option of joint life insurance. This can seem like the more affordable way to cover you both but be aware that once the first half of the couple dies, the surviving partner will not be covered and will have to get a new insurance policy.
I have life insurance through work
You may have life insurance through work if they have a death-in-service cover. This means if you die while employed by the company, your family will receive a lump-sum. This lump sum can be as much as five times your salary.
This is very useful but there are several disadvantages. The main one is that if you ever leave the company or are made redundant, your insurance will immediately come to an end. As you would be older it might be harder to find affordable insurance.
Secondly, you can’t choose how much cover you have and the pay-out for regular insurance is normally higher than it is for life insurance through work. You might want to take out additional life insurance so the two policies can cover your family’s needs completely.
Lastly, death-in-service cover cannot be assigned to cover your mortgage. Would your family be able to continue with their mortgage payments and keep the family home if you were to die suddenly? If not this may not be enough to cover you.
I have young children
If you have young children it would be a good idea to have life insurance at least until they come of age and can financially support themselves. For this, you might want to look at term insurance, the most popular type of life insurance.
Term insurance will cover you within the term agreed only. If you pass away during this time then your family will receive a pay-out. So, for example, if you think your child will be financially independent in twenty years, you can take out life insurance for this exact amount of time.
I have no partner or children
If you are single with no children, there are only a few reasons you might want to take out life insurance. Of course, this is not definite for everyone and even if you do not have a traditional nuclear family, you might have close friends, siblings, or nieces and nephews you want to leave your pay-out to.
If you would like to leave your assets or property, with everything paid off and in order, to a friend or charitable organisation, then this is where life insurance would come in useful. Another reason is funeral expenses. Many people in the U.K. are not aware of how expensive funerals can be and even the most affordable can cost thousands of pounds.
My children are grown
Even if your children are old enough to fend for themselves, you may want to take the steps to protect them financially in the future at what is sure to be a stressful time. The policy that will cover you until the day you die is whole-of-life insurance. This insurance could help cover your funeral costs, your children’s daily expenses, and the costs linked to your death, such as the inheritance tax.
In the UK, the inheritance tax is due on estates worth more than £325,000. If your estate exceeds this, it will be taxed. As the pay-out from your life insurance counts as part of your estate, this can push you over the threshold. However, there is a straightforward step you can take to avoid the inheritance tax and that is — setting up your policy in trust.
Life insurance is harder to get the older you are and if you are over 70, you might find it harder to find cover. Funeral insurance is a policy that pays-out whenever you die, just like whole-of-life insurance, and will at least give your children financial support in funding your funeral.
Where you are in life
I am over 50
Although it is better to look for life insurance early on, there is an insurance policy tailored just for your age group called over-50s life insurance. Anyone will be accepted for this and you do not need to worry about passing medical or lifestyle checks.
As with whole-of-life insurance, a pay-out is guaranteed as this will extend until your death. You may want to consider this if you would like to financially help your family after you pass away with living or childcare expenses or even just to help pay towards your funeral,
I am looking to buy a house
Although it is not a legal requirement for you to have life insurance to get a mortgage, many mortgage lenders will request that you do.
This can also give you peace of mind that your family members can continue to live in their home if you suddenly pass away. Many people choose to get decreasing-term life insurance for this reason. It is a term insurance policy which means you can set it for twenty years, for example, or however long your mortgage repayments will run on. The premiums and pay-out will decrease each year so as to sync in with your mortgage.
I am young and healthy
Many people don’t think it is worth getting life insurance if they are young but remember that the earlier you get it, the more affordable it will be. Even if you do not think it is necessary to get life insurance you may want to consider critical illness cover.
This is a policy that will pay out to you personally if you are diagnosed with an illness or disability which means you can no longer work. If you are dependent on your salary to live on this could be invaluable if you face difficulties later on in life.