Question Of The Week: Life Insurance - Do I Need It?

by Jane Baker on 09 January 2009  |  6 comments
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The Fool’s Q&A forum has been busy over the festive period. Here’s Jane Baker’s answer to the best question this week.

Fools have asked plenty of brain-teasing questions on our Q&A tool lately. If you haven’t seen it yet, check it out here. This week I’ve picked out my favourite question on life insurance and the risk of being over-insured.

Thanks go to Kinios who asks:

Life Insurance - do I need it?

Kinios says:

“I'm a single twenty-something with two properties both of which are mortgaged. One is an interest-only mortgage, the other is a repayment mortgage. I have life insurance policies in place over both properties along with a benefit in work of four times my annual salary should something happen to me. I have no dependants and feel that I am perhaps a little over-insured.

My works policy would cover the cost of both of my properties (or certainly a large part of it even in the current market) and I'm wondering whether I actually need the two other life assurance policies. I have accident, illness and redundancy insurance in place as well.

Is anyone able to help?”

Many people in the UK don’t have nearly enough life insurance to cover their protection needs. That said I think it’s equally important to talk about the possibility of having too much insurance and therefore, paying out for a policy you don’t necessarily need.

When do you need life insurance?

Generally-speaking if you have people in your life who depend on you financially -- whether it’s your partner, your children or someone else -- then it’s a good idea to take out enough life cover to provide for your family’s financial well-being should the worst happen to you. (Take a look at A Fool’s Guide To Life Insurance to figure out how much you need and Eleven Reasons Why You Need More Life Cover for a rundown of all the key life stages when your protection needs might increase.)

But Kinios doesn’t have any financial dependants right now, so this is not a consideration.

Still, before any policies are cancelled, Kinios should think very carefully. There may not necessarily be an obvious need for life cover right now, but that doesn’t mean a requirement for protection won’t arise in the future.

As Fool poster JoeEasedale says:

“It does look as though you have more life insurance than you may need at present. However, a thought for your consideration before you give some up. You will never be able to get life cover as cheap again, in that it costs more, the older we get. Therefore if you think that you may have offspring or a significant other to provide for in the future, keeping on what you have may take on a whole new value.”

(Read JoeEasedale’s full answer and others here.)

I agree with JoeEasedale’s comments. As Kinios is under 30 -- and I assume in good health -- the premiums for these life insurance policies are likely to be relatively cheap. After all younger people are less likely to claim than older people, so the premiums paid will normally be lower, all things being equal.

The Fool’s life insurance search engine shows that someone aged 25, for instance, could buy £100,000 of life cover for less than £6 a month. However, someone buying a life policy aged 40 might pay more than double for the same amount of cover*.

If the premiums are affordable then there’s certainly an argument for keeping the cover in place should Kinios’s need for protection increase in the future.

Kinios should also bear in mind that, while death in service of four times salary provided by the employer is a valuable benefit, the cover it offers will only last as long as Kinios works at the same company. It is possible Kinios may move to a new employer in the future where death in service is no longer part of the remuneration package. So, for this reason, this type of protection should not be relied upon too heavily.

Kinios may also want to speak to an independent financial advisor before cancelling the policy, to get professional advice on these individual circumstances.

Accident, Sickness and Unemployment

Kinios also mentions an accident, sickness and unemployment (ASU) policy. ASU comes under the infamous Payment Protection Insurance (PPI) banner. Regular Fool readers will know PPI has been much-criticized for the poor value it offers policyholders and the difficulty in making successful claims. If you’re not familiar with PPI mis-selling, read this article written by my Foolish friend, Neil Faulkner.

I would suggest Kinios’s main priority is to look at how much the PPI policy costs. Although Kinios doesn’t specifically say, I would guess the PPI plan has been bought alongside the two mortgage loans to cover the monthly repayments if they become unaffordable as a result of an accident, sickness or unemployment. If the policy was sold by the mortgage lender(s) it may well be expensive.

PPI sold by independent insurers -- rather than mortgage lenders -- can often provide a better value deal and this is something Kinios should look into more closely.

Kinios may not have dependants yet but, as a single person, I think it’s crucial some income protection remains in place. Kinios could consider an Income Protection Insurance (IPI) policy or Critical Illness Cover (CIC) as a more comprehensive alternative to the PPI plan. My recent article Why It’s Vital To Protect Your Income outlines the main differences between the two.

That said neither IPI nor CI provide insurance in the event of redundancy, so again, I think it’s a good idea for Kinios to speak to a good independent financial adviser who will make sure all protection needs are adequately covered.

Look out for Question of the Week #6 next week.

If you need a life insurance policy or critical illness plan, compare quotes through The Fool’s Life Insurance Service.

*Premiums are guaranteed and provide lump sum cover of £100,000 over 25 years for a non-smoking male who is in good health.

Editor's Note: This article should not be seen as individual advice for Kinios. We don't know the full financial circumstances so we can't say for sure whether Kinios is over-insured and should cancel any of the insurance policies which are in force.

The comments above are the opinions of the author only and do not represent advice specific to your circumstances

This article has been approved and issued by Direct Life & Pension Ltd who are authorised and regulated by the Financial Services Authority.

The Motley Fool Insurance Service and The Motley Fool Life Insurance is a trading style of The Motley Fool Limited. The Motley Fool Life Insurance is provided and administered by Direct Life & Pension Services Limited. The Motley Fool Limited is an introducer appointed representative of Direct Life & Pension Services Limited, who are authorised and regulated by the Financial Services Authority. Registered Office: Pinnacle House, A1 Barnet Way, Borehamwood, Hertfordshire WD5 2XX

Date of publication as above.

Articles are checked for accuracy at the time of publication but information will go out of date over time. The levels and bases of, and reliefs from, taxation are subject to change as UK legislation and regulations and the UK tax regime are amended from time to time.