Thinking ahead to how your loved ones would cope if you were no longer around can be unsettling. However, having life insurance in place can give you peace of mind that they will be financially protected at a time when they need it the most.
How can life insurance help your loved ones?
When you have life insurance cover in place and pass away during the policy term, a lump sum is paid out to your loved ones. This can be used to repay an outstanding debt, such as your mortgage, or to cover the household bills and other living expenses. It can be used to cover your funeral costs or it can simply be left to your loved ones as a legacy. By carefully planning ahead, you can ensure your loved ones don’t need to worry about their financial security should the worst happen.
When do you need to take out life insurance?
There’s no specific time to take out life insurance but the younger you are, the lower your premiums will be. Having a life insurance policy isn’t a legal requirement but there are many reasons to consider it. Think about whether your partner can afford to repay the mortgage on their own. How long have your kids got left in education? Do you need to pay for the care of a parent? Here, we’ve detailed the eight main reasons to consider having life insurance.
1. You have an outstanding mortgage
As mentioned above, having life insurance isn’t a legal requirement. Some lenders insist that you have it when taking out a mortgage, however, to reduce their risk. Regardless of whether it’s required or not by your lender, a mortgage is likely to be the largest debt you’ll have. Having life insurance cover ensures this debt doesn’t fall to your loved ones to pay in the event of your death.
One type of life insurance – a decreasing term policy – is generally used with a repayment mortgage. The payout from the insurance provider gradually decreases over time as the balance of your outstanding mortgage loan is reduced.
2. You’re married, in a civil partnership or in a long-term relationship
It’s important to make sure that the one you love will be financially protected if you were to die. This is especially the case if you’re the main, or only, earner in your relationship. You can take out a single life policy or you may prefer to have a joint life policy.
With single life insurance, only you are covered. This means that your partner receives a payout in the event of your death or vice versa if your partner takes out a single life policy. With a joint life policy, both of you are covered but the provider only pays out on the death of the first person. This means that a lump sum won’t be paid out to any beneficiaries on the death of the second person. A joint life policy is usually cheaper than taking out two separate single life policies.
3. You have children
Particularly if you have young children, it’s essential to put a financial safeguard in place in case you die. You need to make sure there’s a roof over their heads and that they have enough food and clothing. Their education costs also need to be covered as well as any childcare costs that your partner or a guardian may need to cover.
4. You have other dependants
Aside from having a partner or children, you may have other dependants who would greatly benefit from the financial protection offered by your life insurance policy. Your parent, for example, may need the services of a caregiver or an elderly relative may be in a care home. Your life insurance policy can be used to cover these costs should you die within the policy term.
5. You have a business partner
Life insurance is a good way to protect your business partner from suffering financial hardship in the event of your death. This allows them to continue running the business you both worked so hard to build without worrying about the possibility of having to close it down. You can both take out single life policies or choose to have a joint life policy.
6. To cover your funeral costs
Funerals are expensive and your loved ones may find it difficult to cover the costs of your funeral without financial help. The payout from your life insurance can be used to cover the expense. This ensures that your loved ones don’t have this to worry about while they’re grieving.
7. To cover the inheritance tax bill
Inheritance tax can be very costly to your beneficiaries. One way to cover this huge expense is with your life insurance policy. You need to write your policy in trust. This ensures that it falls outside of your estate and isn’t, therefore, subject to tax. Your beneficiaries will be able to access the funds quickly to settle the inheritance tax bill rather than having to wait for the probate process to complete.
8. To leave a legacy
You may not have any large outstanding debts that your loved ones would have to repay if you died. Your partner may earn enough to adequately cover the normal living expenses and your children may be grown up and financially independent. In this case, you may just wish to leave your loved ones a legacy. This can make their futures more comfortable or help them to reach their goals when you’re no longer around.
The different types of life insurance
The main types of life insurance you can choose from are level term, decreasing term, increasing term and family income benefit.
- Level term: This is the simplest type of cover. You choose the amount to be paid out when you die and the length of the policy term. Regardless of when you die during this term, the payout amount remains the same, as do your premiums.
- Decreasing term: As mentioned earlier, the amount paid out reduces over time to coincide with the decreasing amount of a debt, such as your repayment mortgage.
- Increasing term: The cover amount with this type of life insurance increases over time to be consistent with inflation. This ensures your loved ones receive the lump sum in real terms. Your premiums also increase over time.
- Family income benefit: Instead of receiving a lump sum, your loved ones can receive a regular income until your policy term ends. If you prefer the payouts to be kept in line with inflation, you can choose to have an index-linked policy.
How much life insurance cover do you need?
The amount of cover you need really depends on your reason for having life insurance and your affordability. You may want to ensure that your loved ones don’t have to worry about the costs of your funeral so a smaller amount will suffice. On the other hand, you may have an outstanding mortgage loan to be repaid and also wish to put your children through university. In this case, you need to arrange a sizeable amount of cover.
Monthly premiums for life insurance are calculated on a case-by-case basis. Your age, lifestyle, health status, family’s medical history and occupation are taken into account. So are your preferred type of cover and length of policy term. The premiums are also determined by the amount to be paid out in the event of your death.
Protect your loved ones financially with life insurance
At Trinity Finance, our mortgage and protection brokers – located throughout Kent, London and Edinburgh – are here to help you shape your life insurance policy to ensure adequate financial protection is in place for your loved ones. Just give us a call on 01322 907 000 to get started with your tailor-made life insurance cover. If you prefer, send us an email at firstname.lastname@example.org and we’ll reply to you as quickly as possible.