Many people use the start of a new year to look afresh at their finances.
If you have anyone that relies on your income, whether a spouse or a child, one area that you must think about is life insurance. Should you die, you want to ensure that the loved ones you leave behind aren’t left out of pocket. Life insurance isn’t a luxury and what’s more it’s incredibly affordable.
For example, a 25-year-old male non-smoker can get £140,000 of cover on a level term basis for 20 years for less than £5 a month!
However life insurance comes in a number of different shapes and sizes, and you need to pick the right one for your circumstances to ensure you get good value for money.
The different types of life insurance
Level term life insurance – where the payout you get remains the same no matter when you die during the term of your policy. So with the example we mentioned above, the policyholder would get the same payout of £140,000 whether he died in year one or year 19.
Decreasing term life insurance – where the payout you get decreases over time. This is a popular form of life insurance for people with mortgages, as the amount their loved ones would need decreases with each year as the outstanding mortgage gets smaller. These policies are also cheaper than level term policies.
Guaranteed whole-of-life – with a 20-year policy you are only covered if you die within that period; whereas with a guaranteed whole-of-life policy your loved ones will get a payout whenever you die, whether you’re 36 or 106. As a result, they tend to be more expensive.
Family Income Benefit – a cheaper form of life insurance, Family Income Benefit will pay your loved ones a monthly income rather than a lump sum, freeing them from the worries of what to do with a big payout.
How much cover do you need?
Once you’ve worked out what type of life insurance policy you want, the next big question is just how much cover to go for.
You don’t want to skimp on your life insurance cover and leave your loved ones out of pocket should you die. But equally, you don’t want to pay out for more cover than you need.
You’ll need to consider things like your monthly outgoings, the size of your mortgage and whether you have existing cover from your employer when working out exactly how much cover you need.
To keep your life insurance costs down, you need to show why you are less likely to die while your insurance policy is in place. So try to get in shape, pack in the nasty habits like smoking or boozing too much and consider whether you really want to engage in any extreme sports.
These sorts of things all make a difference.
Don’t be tempted into lying on your application though if you have a few existing issues with your health. If you die as a result of them but didn’t tell the insurer, your cover may be invalidated, leaving your loved ones without a payout.
Single vs. joint cover
Life insurance can be taken out on an individual or a joint basis. So if you are and your partner are both arranging life insurance, you can get a single policy rather than one each.
However, this may not be the best idea. For one thing, a joint policy can actually work out more expensive than two single policies.
There’s also the issue of payouts. If you have two single policies, if you both die within the term of the policy there will be two separate payouts. However, with a joint policy, there’s only a payout on the first death.
Don’t pay inheritance tax on your payout!
The payout your loved ones receive could be severely reduced by inheritance tax. By getting the policy written in trust, you can sidestep this issue.