Is life insurance worth it?

What are the benefits of life insurance?

This article takes a general look at the benefits of putting protection in place, rather than focusing on a specific life insurance or life cover product from one provider.

We have a guide to the benefits of life insurance that gives you a detailed look at the pros and cons of taking out a life insurance policy. But, in brief, life insurance can provide a financial support for your loved ones when you die.

Think about this: if you were to die, would those you leave behind have the financial means necessary to meet their financial obligations?

These obligations could take many forms. Taking out mortgage life insurance, for instance, could help ease the burden on the person who became responsible for paying it if you were no longer around. The same can be said for any outstanding liabilities, such as credit cards, utilities bills and other debts.

Another important question is, even if your loved ones could make these payments, would it cause them to make changes to their lifestyle? For instance, would your partner’s need to work require extra childcare costs? If a mortgage is to be paid, would money for school fees have to be freed up in order to do so?

If you’ve considered the impact of your death on your family’s finances and come to the conclusion that they may or definitely would need some extra help, then life insurance is one way that you can provide some protection.

How do I know if life insurance is right for me?

There are a few simple questions you can ask yourself to determine whether you might benefit from a life insurance policy:

• Do you have a spouse or partner?

• Do you have any dependents?

• Do you have a mortgage that will continue to be due for some time?

• Does your family have other liabilities that they’d have to pay if you were no longer around?

If you answered ‘yes’ to any of these questions, then read on to see how life insurance could help your loved ones manage.

What kinds of life cover are there?

There are two basic types of life cover policy: term and whole life.

Term life insurance

Term life insurance is a type of policy that covers you for a specific period. A policy might cover you for 30 years, and if you were to die during that time, you would receive a payout.

There are three kinds of term life policy: decreasing, level and increasing.

Decreasing term policies offer a payout that is linked to your mortgage. So as you pay more of your mortgage off, the value of your payout decreases. This type of policy is designed specifically so that your loved ones have the resources they need to make mortgage payments if you were no longer around.

Level term life insurance offers a payout that stays at the same value regardless of when you pass on within the term of your policy. You might choose this option if you have a specific purpose in mind for the payout.

Increasing term policies gradually increase the value of the payout broadly in-line with inflation so that, in real terms, the value of the money your beneficiaries receive at the point you die has the same purchasing power as it did when you took out your policy.

Guaranteed Over 50s Whole of Life insurance

Whole of life insurance, as the name suggests, insures a person until their death. Most of these policies are over-50s policies, with relatively small payouts designed to cover concerns like funeral expenses and small, unpaid bills.

Over 50s life insurance policies tend to have a lower payout limit than term life policies as they aren’t designed to pay off large concerns like mortgages, but instead make sure that a few basic expenses like funeral arrangements are easier to manage.

These do not have a term limit, so there is no risk of your policy expiring while you’re alive.

What if I outlive my term?

Terms are designed so that they cover the period when your loved ones would need a payout most. If you have a term life policy, it ends when the term is over. This means that you would not receive a payout if you died after your term had ended.

If you are concerned about outliving your term and not receiving a payout, then it’s possible to take out a different policy for a further term. It’s just worth bearing in mind that, as you will be older at the beginning of this second term, your premiums may be higher.

Or you could get a whole life policy in the form of over 50s life insurance. Remember that the payouts won’t be as high as for term life policies.

What are other options?

It can be sensible to understand how much your loved ones would need if you were to die to get an upper-end figure and then look at the different options available that could each contribute something to this amount.

Most businesses have death-in-service policies. This means that if you were to die while in their employ, they would pay a multiple of your salary out to people you nominate. This is usually 3-4 times your salary.

If you’re planning for the future, it is also a great idea to save. There are numerous ways that you can put money aside in order that your savings work as hard as possible, such as a self-invested personal pension (SIPP) or individual savings accounts (ISAs). Currently, HMRC add 25% to contributions you make into a SIPP, but you are unable to access the funds until you are 55 (or lose the benefit).

Financial planning involves looking at all of the options available to you and creating a secure foundation for your loved ones. Life cover can be an important part of any financial plan, but always make sure you're clear on what a policy covers and that it is the right solution for your needs.