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Get a life (insurance policy)!

Get a life (insurance policy)!

Category: Insurance
Author: Tim Leonard
Updated: 22/03/2018

Life insurance is an emotional topic. By its very nature, it forces you to consider the uncomfortable subject of your own death and its financial implications for your loved ones.

If you don't have life insurance, it can often feel like you're being guilt-tripped into buying. The word "selfish" is often bandied about, like you somehow want to leave your loved ones with a financial blackhole if the worst were to happen.

But selfish isn't a fair assessment. Lack of planning or thought is more like it – after all, your death is something you push to the back of your mind, isn't it?

Risky business, life

If you have a mortgage, and you don't have any life insurance, you are unintentionally making a bet. You are betting that you will live to see that magical last payment when the mortgage is fully repaid. And while it is indeed most likely that you will, it's not a given…

If you have children and you don't have life insurance, you are, whether you realise it or not, betting that you will live to see them become financially independent. Again, it's very probable you will, but it's not a certainty…

It can seem like this is scaremongering (and in some cases, people can be a little over-zealous in trying to press home your mortality to you), but it's really not.

If you have no dependants - a partner or spouse, a child, a disabled relative who depends on you for care – you don't necessarily need life insurance. But when there are risks to other people involved, a life insurance policy can minimise the financial impact of your death.

Life insurance: benefit-driven

In the life insurance industry, there are two ways of classifying how a customer selects cover.

The first is benefit-driven. This means you are looking to cover yourself fully and cost is only a secondary concern (although you still want to keep this to a minimum, of course).

For covering your family, it's really a question of how much you think they'll need. A rough guide is to go by a multiple of your salary (assuming that your mortgage will be repaid by a separate policy), say 10 times your salary if your children are young. The term of your policy usually ties in with a life event, such as when your youngest child reaches the age of 21. Ideally you would then calculate all your liabilities and how much your family would need as a replacement income for the period you need the cover, and then use this as the basis for your insurance.

It's important to note that these examples are just that. How much you need to cover yourself for, and over what term, will depend on your circumstances. If you are in any doubt as to how to cover your family appropriately, be sure to seek financial advice.

Life insurance: premium-driven

If you're not benefit-driven, you're premium-driven. This means that you'd love to be fully covered, but you don't have the budget to be. You therefore try to get as much cover as you can for your money.

For example, you have a mortgage with your partner for £100,000.

You've looked around and realised that for your budget of £10 per month you can't get enough life insurance to fully cover the balance. You can't afford any more than £10.

So, you then get quotes from various insurance companies to see how much cover you can get for your £10 per month. Insurer A offers £40,000, whereas Insurer B offers £50,000, so you opt for Insurer B.

This isn't ideal by any stretch. But instead of your partner having to face the full balance on their own, they would have £50,000 of it paid off, making the mortgage payment far more manageable for a single person.

Be sure to arrange premium-driven cover on a Level Term basis as opposed to Decreasing Term. A Decreasing Term policy would pay out more in the early years and less in the later years (as it follows how a mortgage balance would decrease as you repay it). This could potentially leave you under-covered in the later years. By contrast, a Level Term life insurance would pay out the same amount regardless of when in the term a claim was made.

Life changes

Your life insurance should be regularly reviewed. This isn't just to make sure you are still getting a competitive premium; it's also to make sure it still meets your needs.

You may move home and have a higher or lower mortgage balance, or perhaps you have a new mortgage over a longer term to make it more affordable. Or maybe you have had another child, so your childcare expenses have risen…

These things affect your cover. Life changes, so make sure your life insurance changes too!

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.