It’s hard to think about what would happen to your family should you die, but it’s important to ensure they’d be provided for. Life insurance is a cheap and effective way of giving your family the financial security they need. However, it can be hard to know exactly what type of cover you require, how much you should actually be paying and where you can buy policies from.
Here we’ve put together a comprehensive guide to life insurance, giving you information on everything you should know in order to make an informed decision and how to get a good deal, so your family get the right cover at a great price.
What Is Life Insurance?
The most popular kind of life cover is a level term policy1, which pays out a fixed sum of money if you pass away during the life of the policy, for example within 18 years. The amount your dependents receive will be the same regardless of whether you die near the beginning or the end of the agreed period. If however, you reach the end of your policy and are still alive they won’t receive anything.
The cost will depend on the amount of cover you want and the length of the term. Typically, policies will also be cheaper the younger you are2, as insurers see you as less of a risk. It’s important to cover yourself for a long enough term, and if you have dependents, this is usually until at least the age at which they would leave full-time education.
Who Do You Need To Provide For?
Before you buy life insurance you need to think about who you’re providing for after your death. For those who have a partner or dependents, if they’d be financially affected when you pass away, life cover would be a good idea, as it will help them cover the mortgage, pay bills and provide food on the table if the worse was to happen. If you don’t have anyone that relies on you and your income then taking out a policy wouldn’t be worth it.
How Much Cover Do You Need?
Deciding on how much cover you require is one of the most important considerations, as you don’t want to take out too little cover and not leave them with enough money, but you also don’t want to be paying too high a premium if you don’t need to.
The general rule is to buy a policy that pays out 10x the annual salary of your households main earner3, but if you can’t afford this then stick with whatever you can. The cover should be enough to pay off outstanding debts (including your mortgage if there isn’t separate insurance), immediate costs that your dependents will need to cover, future costs (such as university) and expenses related to your death (like the funeral).
Should You Get A Joint Policy?
If you have a partner it can be cheaper to get a joint policy4, but this will only pay after the first death, so you might want to consider having two single policies if you have dependents.
Reduce Your Risk
The more likely an insurer thinks you are of dying the more expensive your cover will be. Some of these factors can’t be changed, for example, if you have a pre-existing medical condition, and non-smokers will pay considerably less than a smoker. To be classed as a non-smoker an insurer will generally need you to be completely free from nicotine for a year or more, but it’s important to check the criteria, as some have raised this to five years5.
Fixed Premium Costs
Premiums can either be paid on a fixed or reviewable basis. With a guaranteed premium you’ll know exactly what the monthly cost will be and the price will never go up. Reviewable premiums can seem cheaper at first, but the insurer can put up the price at a later date6.
Finding A Great Deal
Insurance premiums can vary considerably, so it’s best to shop around and compare policies to make sure that you’re not paying too much. If you only talk to 1 insurer, you have nothing to compare it to, so lots of people go through comparison sites, but these will take a large commission for introducing you.
Discount brokers can be a cheap way to buy a policy, as they charge you a one-off fee and then any commission is put into the policy, so you’ll be getting a discount on the cover. However, they can’t provide you with any advice and if you’re not sure of what type of cover you require an advisory broker might be the best option. This will cost more as the broker will receive some commission7.
You can also get help from an independent financial adviser (IFA) who can give you guidance on other financial products as well. IFAs are regulated, but the costs will differ according to their commission or fee rates.
1 Finweb.com How Popular Are Different Types Of Life Insurance Coverage?
2 CompareTheMarket.com What age should I take out life insurance?
3 Express.co.uk Martin Lewis Explains How Much Life Insurance You Really Need
4 Directline.com Single Or Joint Life Insurance?
5 Insure.com Can You Hide Smoking From Life Insurance Companies
6 Morethan.com Guaranteed Life Insurance Premiums and Reviewable Premiums
7 Moneyadviceservice.org.uk When To Use An Insurance Broker?