A Parent’s Guide to Life Insurance
This primer is designed for families in the UK.
What is Life Insurance?
Life insurance is a type of insurance that pays out a chunk of money or a regular income if you die.
You might not need it if you don’t have people relying on your earnings. But if you have a partner or children, life insurance could help them pay the mortgage or other living expenses if you were no longer around.
What is Life Insurance best for?
Financial protection for anyone who depends on your income.
How exactly does Life Insurance work?
No-one likes thinking about death, but if the worst should happen, life insurance can help protect your nearest and dearest from money worries. Don’t let your family lose their home, as well as a parent or partner, because they can’t afford the bills.
There are two main types of life insurance:
'Term' Life Insurance
‘Term’ insurance, which pays out if you die within a certain time. If you don’t die before the time ends, or die afterwards, the policy won’t pay out.
'Whole of life' Life Insurance
‘Whole of life’ insurance pays out whenever you die, no matter how far in the future, provided you keep paying for it. It’s often linked to certain investments such as endowments, or designed to pay funeral expenses.
The simplest form of life cover is ‘level’ term insurance. You might choose for example a policy that will pay out £100,000 if you die within 20 years. A lump sum could clear an interest-only mortgage, plus any extra money for your family to live on.
Alternatively, with less expensive ‘decreasing’ term insurance, the potential payout gets smaller over time. This could help clear a repayment mortgage, where the balance goes down as you keep making monthly payments.
If you’d rather leave an income instead of a lump sum, look out for Family Income Benefit. These policies pay out a regular income every month until a specified date. So for example you might choose a policy that runs for 20 years and would pay out £2,000 a month after you die. If you die a couple of years into a 20 year policy, your family would receive £2,000 a month for 18 years – but if you die in year 18, they would only get the income for two years.
Factoid
Men and women pay the same for life insurance, even though women are expected to live longer.
What affects costs?
As with any insurance, you have to weigh up the amount of insurance against how much it costs. Fundamentally, if you want to insure a larger amount for a longer time, it’s going to be more expensive. You will also pay more as you get older, if you suffer from health problems or if you smoke.
Little complication: The truth matters
Don’t be tempted to miss stuff out when applying for life insurance. For example, if you don’t mention health problems, your policy could be void. That means the insurer might refuse to pay out if you die, and your monthly payments will all have been wasted. Better to tell your insurer about health issues, even if they end up charging more or adding exclusions. If you’re worried about filling in the forms correctly, ask a life insurance specialist for help.
Usually, you can choose between ‘reviewable’ or ‘guaranteed’ premiums. Reviewable premiums may well be cheaper by a few pounds a month – but do look at the long term.
Reviewable premiums might start smaller, but the insurer can choose to hike them up hugely as you get older. With guaranteed premiums, whatever you pay for your premiums now will stay the same in future. If you are young, fit and healthy, you can use guaranteed rates to lock in a low monthly cost for the entire policy.
Good to know
Life insurance gets more expensive as you get older. For example, a 35 year old might pay as little as £6 a month for £100,000 life insurance over 20 years. However, a 45 year old would pay more than £10 a month for the same policy, according to specialist protection adviser LifeSearch.
Who should get it?
Life insurance can be vital if people depend on your income – for example a partner or children who are still in full time education. It could keep a roof over your family’s head, food on the table and clothes on their backs if you were no longer around. Life insurance can also be important for stay-at-home parents, if it means the main breadwinner can afford to take time off to look after children, or pay for childcare.
However, if you are single and don’t have any dependents, you might not need life insurance. Even as a couple, if you have large enough savings and a partner who earns enough to cope without you, you might not want to pay extra for insurance.
Life insurance payouts can also affect low earners, if the money means they can no longer claim means-tested benefits such as Tax Credits or Universal Credit.
Good to know
Don’t rely on the state. If you die, the Government can only offer limited support for your partner and children. Benefits after bereavement were cut in April 2017.
The surviving parent is now only entitled to a maximum bereavement support payment of £9,000, split as a lump sum of max £3,500 followed by up to 18 monthly payments of £350. Plus, these benefits don’t cover unmarried parents. More details here.
Expert View"Life insurance was a must for me as soon as I became a homeowner. If I die, it means the mortgage will be repaid in full leaving a considerable asset for my partner or children. Life insurance is really important to me as both my parents died when I was a teenager, leaving no money to me or my siblings. I am very aware that this awful event can happen and wanted to ensure my partner and children are provided for should I die. A sad thought, but necessary insurance to have.”
Things to consider before getting Life Insurance
Who will it need to cover?
Consider who your life insurance should protect. It could be your partner, children, or even parents and other relatives, if they rely on you financially.
What does it need to cover?
Think debts and dependents. Many people buy life insurance to cover their mortgage, and that’s a great start. But you might want a bigger payout to cover other debts, living expenses and future spending such as university fees. Some life insurance plans are specifically designed to cover smaller amounts for funeral expenses.
How long should it last?
Buying insurance for the whole of your life can be expensive, so think about when the money would be most needed. For example, you might only need insurance to last until your children leave home, your mortgage is paid off, or your partner is old enough to claim their pension.
Where to buy it?
Like any kind of insurance, costs vary between different companies, so do compare prices. Insurers pay commission to people who sell life insurance, including comparison websites, which can bump up your insurance costs. If you know exactly what life cover you want, and the differences between policies, you can save money by using an online discount broker. You may need to pay a small set fee, but they will pay you back some or all of the commission. However, if you are not sure how much cover you need, or which sort of life insurance is right for you, consider getting help from an independent financial adviser (IFA). For example, Lifesearch and Lifeassureonline specialise in life cover and other protection policies.
Do you need other insurance?
Life insurance only pays out if you die - but what if you can’t work any more due to illness or disability? You can also get insurance such as critical illness and income protection designed to pay out if your income stops but you don’t.
Jargon Buster
Insurance vs assurance: if you see someone writing life ‘assurance’, it’s not a typo! Assurance is for something that will definitely happen, while insurance is for something that only might happen. Whole of life cover is an assurance policy, because we are all guaranteed to die some time.
Top tip: Stay single
As a couple, you can choose between buying a ‘joint’ life insurance policy that covers you both, or two separate ‘single’ policies. A joint policy might cost slightly less each month, but will only pay out once when the first person dies, leaving the second person without any life cover.
Top tip: Write a trust
You don’t have to pay income tax on life insurance payouts - but they can be hit by inheritance tax. Avoid handing up to 40% to the tax man by writing your life insurance in trust for the people you want to benefit, so any payments from the policy aren’t counted when calculating inheritance tax. Ask your life insurance company for trust forms to fill in, but do seek legal advice is there’s anything you are unsure about.
Jargon Buster
‘Premium’ doesn’t mean you’re getting super fancy insurance, it’s just a word for the monthly payments.
Expert View“The key thing which a lot of people don’t consider is whether life insurance should be written in trust or not. The biggest benefit of writing life insurance in trust is the speed of payout. At a time of emotional upheaval, you don’t want your family suffering financially while waiting for money to come through. Life insurance could pay out in two to three weeks if it’s held in trust, as opposed to potentially months if it is subject to probate. Your insurer will provide trust forms with your policy, but if in doubt, seek legal advice.”
Rooster Summary
Life insurance can provide the peace of mind that your family won’t be destroyed by money worries if you die. It can cost less than a tenner a month to start a policy if you are young and healthy, but if your circumstances are more complicated, do seek advice.