As we grow older, our responsibilities grow too; getting married, buying a house and having children are responsibilities we gladly accept but how often do we think about who would care of of them if we died?
According to studies, less than half the population have life insurance meaning families could be left struggling to cope with the financial burden if a parent should die. If you are the main breadwinner in your family, with a mortgage to pay and children dependant on you, it is imperative that you have a plan to help provide your family with the means to manage without you. Even if you are not the highest earner in your family, think about the cost to your family if you weren’t there. The tasks that stay at home parents do would have to be managed by the main breadwinner, either by employing help or by reducing work hours. Either way, the benefit of having life insurance ensures that for the term of your policy, your family will not have to endure financial strain, as well as the loss of a loved one.
How long should your life insurance policy be?
Deciding how long your policy should be for is an important decision. How long you have on your mortgage is key, as well as how long your children will be dependent on you for. If you choose a fixed term policy, it will only payout if you die during the policy term, however a whole-of-life policy will insure a payout no matter when you die, as long as you are up to date with your premiums.
How much life cover should you have?
The amount of cover that you need depends entirely on what you want to protect in your absence. Ideally you should look to have enough cover to pay off your mortgage and have additional funds to provide your partner and children financial security.
If you just want to cover your mortgage, you don’t need your policy to be inflation-linked, but if you need it to maintain your dependants current lifestyle then it would be wise to get a policy linked to inflation. Linking to inflation is a good way to make sure that the value of your cover is sustained, particularly if you are insuring for a longer term. However, it does usually cost more as the amount of cover and the premium you pay will both go up each year in line with inflation.
What about mortgage cover?
You will also need to ensure that the level of cover matches your mortgage debt. So if it’s going to take you 20 years to pay off your mortgage, your insurance term should be 20 years also. Level term insurance will pay out a fixed sum if you die during the term of the policy. If you have an interest-only mortgage, then a level term policy can give you the cover you need. Decreasing term insurance means that the potential payout falls each year, which is suitable if you have a repayment mortgage since the amount of cover you require lowers as you pay off your mortgage. Decreasing term insurance is usually cheaper as you get less cover overall.
Things that really matter when choosing life insurance
If you are looking to support your family with your life insurance, you can look at family income benefit insurance which will pay out an annual income instead of a lump sum. This kind of policy can mean lower premiums but has the main benefit of you knowing that your family will receive a regular set amount, rather than having to worry about how to invest a lump sum, the risks involved with investing and it also ensures they don’t run the risk of spending all the money at once. The level of cover you get is entirely up to you, but if you can match your current, or future, take home salary, then you can ensure that your family won’t need to change their standard of living.
When it comes to you and your partner choosing life insurance policies, you may consider getting a joint policy. This is a good way to save money, as it is often cheaper than two separate single policies. However, a joint policy usually operates a “first death” basis, which means that when one person on the policy dies, the money is paid out and the policy ends.
Starting a life insurance while you are young, or at least healthy, is a good way to keep the cost of your premium down, but it is important to keep your policy updated with any changes to your circumstances, for example if you move to a larger property or have another child.
Read the small print before agreeing your life insurance
For an extra cost of about 2% of your regular insurance payments, you can buy ‘“waiver of premium” cover. If you can’t work, due to illness or injury, this waiver will cover your premiums, but usually only after you have been off sick for at least six months. You should take care reading the fine print before purchasing so you know exactly how this protection works. Some life insurance policies may provide cover for terminal illness, but not all so you may also want to consider Critical Illness Cover in addition to your life insurance plan. You can read more on that here.