How to pick the right life insurance policy
As a new survey suggests two-thirds of adults don't have life insurance, we look at how to work out which policy is best for you?
A new survey by Barclays suggests that two-thirds of adults in the UK do not have life insurance.
Three reasons were highlighted by the majority of those without cover to explain why they are giving life insurance a miss. 42% blamed the difficult financial climate and the need to cut back on spending, 27% noted they had separated from a partner and a quarter argued life insurance is a waste of money.
It's true that not everyone needs life insurance, as we explained in this article. However, if someone - your wife, your child - would be adversely affected by the loss of your income should you die, then you really should have some cover in place.
So where do you start?
How much cover do you need?
One of the first things to consider when buying life insurance is exactly how much cover you want to take out. This can vary quite significantly depending on your circumstances, so it’s worth giving it some proper thought.
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For example, do you want cover that will simply cover the cost of your mortgage? Or do you want to pay a bit more so that not only does it pay off the mortgage, but your loved ones are left with a small lump sum too. After all, while it’s nice that the mortgage will be paid off, they are going to have to make do without your salary every month too.
But what if you don’t have a mortgage? How much cover should you go for? And then there’s inflation to take into account.
We have a life insurance cover calculator right here at lovemoney.com that you can use to give you a decent idea of how much cover you’ll need, but in the end you’ll have to decide for yourself how much is necessary. Just don’t make the mistake of buying too little cover – it won’t be you that pays for your mistake, but the loved ones you leave behind.
What type of policy?
Knowing how much cover you want is only part of the decision though – just as important is the type of policy you go for.
That’s because life insurance comes in a number of different forms. It’s important you pick the right type of cover for your circumstances. Let’s take a look at the main ones.
Level term assurance: Thankfully with life insurance, the clue tends to be in the name. In this instance, the cover is level across the term of the policy – in other words, whether you die in year one or year 40 of your policy, the payout remains the same.
Decreasing term assurance: The payout you receive from this type of policy will decrease over time. This is typically chosen by people with mortgage debt – the idea is that you will owe less on the mortgage in 20 years than you do today, so will need a smaller payout in order to clear the mortgage debt. What’s more, premiums for this form of life insurance tend to be smaller, too, compared to level term assurance.
Increasing term assurance: As the name suggests, the amount your family will receive from the insurance increases the later the term goes on. This is basically a way of inflation-proofing your cover, as in 20 years the £150,000 cover you’ve gone for will likely be worth a fair bit less in real terms.
Guaranteed whole-of-life insurance: Term assurance will only pay out if you die within the specified term, say 40 years. However, if you want to ensure that your loved ones get a payout even if you die at 90, then whole-of-life insurance is the option for you.
Family Income Benefit: This is a frequently ignored form of life insurance, even though it offers appropriate cover for many people, and is cheaper than traditional forms of term assurance. A family income benefit policy will pay a monthly income to your loved ones, rather than a lump sum. This is a big selling point, as you may not want to leave your loved ones having to make complex investment decisions with the lump sum they would get from other policies upon your death. For a full explanation of family income benefit, check out Save 35% on your life insurance!
Single vs joint policies
Next, you’ll need to decide whether you want to go for a single policy or a joint policy with your other half. Not that long ago, it was cheaper to go with a joint policy. However, that has changed in recent years.
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There are also practical issues to consider – when you go for separate policies, you are essentially getting double the cover, as with joint cover there will only be a payout on the first death.
This is standard advice for all financial products really, but it’s particularly important with life insurance. Don’t just accept the first quote you receive – shop around and see if you can get a better deal elsewhere. The marketplace is so competitive, it can really make a difference to your costs if you shop around properly. Why not give our life insurance comparison engine a go?
Of course, it’s worth remembering that when picking a life insurance policy, it pays to look beyond the headline rate. Be sure to read the small print so you understand exactly how your cover works – you want to pick the right policy, not just the cheapest.
Using a trust
Even once you’ve found the perfect policy, you still need to consider a potentially vital factor – putting the policy ‘in trust’. This can make a big difference to your inheritance tax bill, as placing your policy in trust effectively removes it from your estate.
This means your loved ones will receive the payout quicker, as they will not have to wait for your estate to be divided up. What’s more, the payout will also be free from inheritance tax, potentially giving your loved ones an extra 40%! For more on inheritance tax planning, have a read of How to cut your Inheritance Tax bill.
The fact is that life insurance is going to go up in price in the next year, something we detailed in this article. So if you don't have cover but need it, don't hang about. Hurry up and get some life cover!