Nobody wants to think about their own death, but if you have children or any dependants, it’s vital that you take out insurance to allow them to continue on as normal if you should pass away.
There are a lot of key terms that you may need to get your head around before you begin – it’s quite simply once you have your head around it.
If you have dependants who rely on your income, you should take out life insurance. Try to make sure you’re covered for the cost of all the debt that you have plus the cost of your funeral arrangements.
Take out a term that covers the length of time that your mortgage has left or the years until your children turn eighteen.
Table of Contents
What is life insurance?
In short, life insurance is a type of insurance you take out to ensure that your loved ones are protected financially when you die. You might choose to do this because you’re the main earner in your household and your family would not be able to continue making payments on the mortgage or have enough money to live within their means once you are gone. Take some time to work out how the finances can be managed if you or your partner were to pass away.
There are several different types of life insurance, so you need to make sure that you are taking out the right type for your needs. You can get a single policy and a joint policy – though it’s worth noting that it will only pay out once in both cases. In the case of the joint policy, you will receive a pay-out when the first person dies. This is useful if you have joint liability over the income in your household and aren’t sure who will die first.
This is pretty simple – you pay a premium every month for the rest of your life. On your death, your loved ones will receive a lump sum that was predetermined at the start of the policy. Your average price comparison site won’t usually have this type of insurance.
This is slightly different. You cover yourself for a specific term, if you die during this time then your loved ones will get a pay-out. If you don’t die, you will not receive anything.
Level Term – a level term policy will remain at the same coverage throughout the term of the insurance. This is useful if you’re taking it out to give your loved ones a fixed sum.
Decreasing Term – the pay-out of this cover will decrease over time. This is usually taken out to cover a loan or mortgage and will decrease at the same rate as the loan it is covering.
How long do I need?
You are covered for a set amount of time for this type of cover. If you’re covering a mortgage, you might want to make sure you are covered until after it will be repaid. If you have children, you might want to cover the number of years until they turn eighteen.
How much do I need for life insurance?
You’ll need to work out how much cover you’d like. Consider the following:
How much do you want to leave your dependants?
This is money you’ll want to leave your dependants in order for them to be financially protected, and not drastically change their lifestyle due to your death. An easy way to ensure this is to multiply your annual take-home pay with the number of years until they turn eighteen, or the number of years you’d like to continue supporting them.
How much of your mortgage is outstanding?
This is pretty self-explanatory – how much money would be needed to completely pay off your mortgage? If you pay half with your partner, you might want to only cover your half, but make sure you discuss this prior to taking out a policy.
How much do you have in other debts?
If you have a loan or a credit card, how much do you have outstanding on these? You can have a quick look at your credit report on Credibble to find out your total debt.
How much will your funeral be?
It would be helpful to include the cost of your funeral in your life insurance policy to ensure that your loved ones aren’t out of pocket when you pass away.
Add up all of these figures to get the total amount you’ll need to cover yourself for.
Some assumptions will be made about you when you search for a quote. These are usually around the risk of your job, your general health, your use of recreational drugs and your family history. If any of the assumptions about you are incorrect, the quotes that you will receive may not reflect the actual cost to you – spend some time on the individual websites to get more detailed quotes in this case.
Do I need life insurance?
You should consider taking out life insurance if:
- You have kids or other dependants who currently rely on your income
- You have family living in a house which you are currently paying the mortgage on.
If you do take out life insurance, make sure you take out some kind of cover for your funeral arrangements.
You might not need life insurance if:
- You’re single
- Your partner’s income would be enough for your family to live on and continue with the mortgage payments
- You’re on low income
If you choose not to take out life insurance, you should still set aside money for your funeral arrangements.
What are the costs of life insurance?
The costs of your premiums will generally depend on several different factors. Make sure you shop around and compare different offers.
Costs will depend on:
- Age – generally, the younger you are, the less likely you are to die. This means that you’ll pay less, as the likelihood of them needing to pay-out is lower.
- Health – your general health is important when taking out life insurance. If you have generally good health, you’re considered less likely to die, making your premium cheaper. Make sure you are honest about your health when purchasing your insurance.
- Lifestyle – if you take part in a dangerous sport or job, you’ll likely have to pay a higher premium.
- Whether or not you smoke – it’s no secret that smoking decreased your life expectancy and therefore, if you smoke, you’re more likely to pass away within your term of insurance.
- Length/type of policy – Your price will differ depending on the length or type of policy you have. Term assurance policies tend to be cheaper, as there’s less of a chance that you will die during the term.
Does your employer cover your life insurance?
In some cases, your employer might have something called death-in-service. This is similar to life insurance, where your employer will pay a lump sum to your family if you die whilst working for them. Your death doesn’t need to be at work or related to work, you simply need to be hired by them at the time of your death.
It’s worth noting that this isn’t the same as life insurance – the pay-out is often related to how long you have been with the company and may not be enough to fully protect your loved ones when you pass away.
You can take out life insurance to cover the difference between how much your employer covers you for and how much you need. This would cost you considerably less than covering yourself in full.
You’ll only be covered while you’re employed by the company as well, so make sure you take out full cover if you decide to leave them.
Consider other forms of insurance
It might be the case that life insurance isn’t what you need – if this is the case, there might be another type of insurance that can do what you need. Read on to find out about similar insurance policies that could help you instead.
Income Protection – will pay you a sum if you find that you cannot work due to illness or injury. This is usually worked out as a percentage of what you would ordinarily earn.
Critical illness insurance – Will protect you financially if you are diagnosed with a serious illness or are injured. The illness or injury usually has to be specifically mentioned in the policy in order to be covered.
Additional – Can pay out more than once. These will pay out if you are diagnosed with a critical illness and in the event of your death
Combined – Can only pay out once. Will pay out the full amount if you are diagnosed with a critical illness or in the event of your death.
Payment protection insurance – Helps you continue with payments on a loan, credit card, or mortgage when you can’t work due to illness, an accident, or redundancy.
Now you’re in the know about life insurance, you’re ready to start searching. Make sure you read the small print of the policy you end up taking to ensure that you’re fully covered. You can use Credibble’s life insurance tool to search for and apply for life insurance.