Consumers are bombarded with adverts for travel insurance, car insurance and even insurance for your clothes and furniture – indeed there are laws requiring that people obtain insurance in certain circumstances – but there is no law encouraging us to insure the most important asset we have – ourselves. Perhaps, as a result, less than a third of adult homeowners in the UK have life insurance, according to a recent study, by Compare The Market, of 3,000 people.
Just like making a will, considering life insurance forces us to take a look at the bigger picture. It might not be something we want to think about, but getting the right cover allows us to at least check one important item off the list and not worry about it. The responsible thing is making sure that your partner, children or any other dependants wouldn’t be left in the lurch if you weren’t there.
“Where you start having to put some serious thought in is when you have children,” says Phil Billingham, director of Perceptive Planning. “If something happened to us, where would they go and who would look after them? Where’s the money coming from? In that kind of situation, worrying about money is the last thing anyone wants.”
What exactly is life insurance?
It’s essentially a policy that you pay a premium for, and in return, the provider pays a lump sum to your beneficiaries if you die. The most common way to buy life insurance is online – even places like Tesco sell it – or through a financial adviser. It’s also possible to access personalised life insurance from the independent insurance advisor Anorak through the Starling Marketplace.
There are three main types of life insurance. Level term life insurance pays out a set fee within a certain timeframe, say, 20 years. Whole of life insurance has no fixed timeframe. A mortgage decreasing-term life insurance reduces the amount it will pay out as your outstanding mortgage goes down over time.
How much you will pay per month depends on several factors including your age, your health and the level of cover you need. But even in your 40s, Billingham says life insurance can be relatively cheap, around £20 a month for two people. Financial expert Martin Lewis’ advice is the cheaper the better, as long as the brand is reputable.
Who should get it?
“Life insurance isn’t for everyone,” adds financial planner, author and presenter Warren Shute. “But it’s essential that everyone consider it.”
If you’re young, free and single, or if you’re older and have paid off your mortgage and have no dependents, you may not have a pressing need for life insurance. But even if you don’t have children or you’re not married, in some cases it could still be a good idea to look into it.
“We do recommend it in circumstances where the death of one person could lead to financial hardship for another,” says Phil. “Because it’s all very well to assume that one partner has a financial plan, and their pension and investments do well, and they’re going to be financially secure, but what happens if they die? Life insurance is about filling the gap.”
Many people buy life insurance when they’re taking out a mortgage. The aim is to make sure they don’t leave any dependents with debt if they die before the mortgage is paid off. However, data shows only around 8 million out of over 11 million mortgaged properties in the UK have life cover. It’s worth pointing out that technically speaking you can’t inherit debt, you can only inherit assets, but your mortgage provider may require your dependent to sell your house if they can’t pay off the rest of the mortgage. But you need to think more broadly than just paying off the mortgage.
“If the person left behind is unable to afford the mortgage on their own, life insurance is definitely a good idea,” says Warren. “But a mortgage is still a fraction of the overall expenses – what about bills, shopping, travel? They also need a monthly income.”
Warren says that, to avoid a whole level of extra stress, one idea is to obtain a family income benefit policy. It is a different kind of life insurance which pays out a monthly, tax-free income instead of a lump sum.
If you’re in a relationship, Warren advises each person should get an individual policy and tailoring it to their needs. For example, if one person earns £100,000 and the other £20,000, each person will need different levels of protection.
“This might be marginally more expensive, but it often makes financial sense,” he advises.
What’s the deal with trusts?
Once you’ve picked the policy and decided who should benefit from the payment, make sure that money goes into a trust – a legal arrangement – which is free to set up, although the financial or legal advice you might use to set up a trust is not. Otherwise your money will go into your estate and dependents will have to wait longer to receive it.
“A trust is about getting the right money to the right person without probate,” says Phil. “You have a trustee, who applies to the life company upon your death and the money is paid to the right people in days or weeks, tax free.”
If the money is for minors, the trustee has a legal requirement to look after the assets in a separate bank account or invest it - it can be used for education or housing for example. “It’s just easier, otherwise you have to go through probate, which can take longer and be more stressful,” says Phil.
So, you’re paying your insurance premium, but what happens if life throws you a curveball? The best way to stay covered is to take out a “rider” – in insurance speak this is an “add on” to your existing policy, just like you might pay a bit more on your travel insurance if you’re going skiing. You can buy a “waiver of premium rider”, which means if you fall sick, can’t work and therefore can’t keep up with your premium payments, your life insurance will remain unaffected. There are similar riders in case you have an accident or you become disabled.
Financial advisers claim people should carry out an annual review of their finances, similar to giving your house a spring clean. So, does that life policy still cover your needs? Are the beneficiaries still the right people? Especially after certain changes in your life such as marriage, divorce, moving home or having a child, it’s worth checking you have the best deal for your needs.
Insurance can give you a sense of relief. Whatever happens, those who depend on you are covered.