Life Insurance: Protecting Your Family
Life insurance: protecting your family
Life insurance protects your family’s standard of living if you die prematurely. But you need the right kind of life insurance. Don’t confuse the life insurance which offers protection with the type which calls itself life insurance but is really a savings plan. Go for a policy that offers a high level of cover for a low premium.
There are two types of life insurance designed to give protection — term insurance, which pays a tax-free lump sum, and family income benefit, which pays a regular tax-free income. With both types, you get nothing if you outlive the policy.
• You choose the number of years, or term, the policy is to run. If you insure your life for £100,000 over 15 years, you only pay premiums for 15 years, and the policy only pays out the £100,000 if you die during that time.
• The insurance can be for any term you want — just a year or 25 years or more. The amount of insurance, and the premiums can be increased each year — increases of three and five per cent are common.
Family income benefit
• If you insure for £10,000 a year for 15 years and you die while the policy is in force, your family gets £10,000 a year for the rest of the 15 years. Like term insurance if you survive the policy you get nothing.
Covering Your Mortgage
Mortgage protection insurance is a cheap form of term insurance for people who have opted for repayment mortgages. The term of the policy matches the length of the mortgage, and the sum that you are insured for decreases as the size of the loan falls.
Who needs life insurance?
So long as no one depends on their income, single people don’t need life insurance. Some mortgage companies insist on life insurance to cover a loan, but it’s not strictly necessary. If you are single and don’t want to leave your house to someone, find a mortgage company which doesn’t insist on life insurance.
If only one partner works, life insurance is necessary — particularly if the non-working partner could not get a well-paid job. Use term insurance or family income benefit up to retirement age, and put any surplus cash into a pension.
Couples with children
A lot of life insurance is needed. Use term insurance and family income benefit up to the time you expect the children to finish their education. Insure the value of a non-working partner if you depend on her (or his) work at home. Would you need to pay a housekeeper and someone to look after the children if she wasn’t there?
Do you have enough life insurance?
• Make sure your family would have an immediate lump sum to pay funeral costs, and to replace a company car, if you have one. Use term Tips on how to save insurance for this and have the policy written in trust so it can be paid out immediately rather than having to wait for probate. If your employer provides life insurance, this is normally paid immediately as well.
• Use the Budget Planner to work out how much your family would need each year if your income stopped.
• Make an allowance for what your employer will provide. Most companies pay a lump sum of between two and four times your yearly salary if you die while you are still at work — enough to provide an income if invested in a bank or building society — and a spouse’s pension too.
• If you have a mortgage, it is likely to be covered by insurance, so deduct mortgage payments from your calculation.
• Check if other loans are covered by life insurance.
• Now make sure your family would have enough to live on by taking out a family income benefit policy.
• You should also have sickness insurance.. You are likely to need more sickness insurance than life insurance because you won’t be able to deduct your personal expenses from the family budget.