There are a number of factors to consider when assessing your life insurance needs. You may have recently bought a house, got married, had children, or become self-employed. All of these can be significant in terms of buying or upgrading a life insurance policy.
Number of Dependants
The most important factor to consider is how many people are counting on you
to support them financially. Take into account the kind of lifestyle they are
accustomed to and the lifestyle you would want for them in your absence.
If you are single or do not have any children or outstanding debts, life insurance is unlikely to be necessary, but you may wish to explore Critical Illness Cover or Income Protection. Statistically you are more likely to suffer ill health and be off work for six months than you are to die, so you might wish to protect your income against ill health. Don’t forget you may already have some life insurance and/or illness cover through your employer.
However, if you are married, it is important to consider all your financial responsibilities and how they are protected. Your partner would suddenly be the sole income earner if you die and would need to provide for any dependants alone. A life insurance policy would enable those dependants to maintain their existing standard of living.
If you have children, life insurance will ensure that they are left with an inheritance and it also it can be used to cover their education costs. If you are a divorcee with children you should check the divorce papers as there may be a clause that requires you to keep life insurance in force to cover the children’s education fees.
It is also important to take into account that your parents may also become financially dependent on you during their later years. Life insurance will ensure that they are financially secure in the event of your death.
Debts
Any outstanding mortgage repayments, medical bills, car/credit card loans or
other debts will need to be paid off even if you die. Life insurance provides
liquidity to your estate and can be used to pay off these debts rather than
having to deplete any inheritance assets.
The detail
If you have a standard repayment mortgage paying off both capital and interest
over the term of the mortgage, a ‘decreasing term’ life insurance
policy worth considering. This option is typically 33% cheaper than a ‘level
term’ life assurance policy and the cover amount is designed to decrease
as you gradually pay off the debt to your mortgage lender. This policy will
therefore often only cover the amount of the mortgage and will not leave you
with an additional lump sum once the debt has been repaid.
A level term life insurance policy is often used to protect an interest only
mortgage. This policy type is more expensive but has the advantage that the
sum asserted stays fixed for the term of the policy and the policy is guaranteed
to pay out this sum. This level term option can also be used for a repayment
mortgage. Although it is more expensive than the decreasing term option, it
does have the advantage that any payout can be expected to not only pay off
the mortgage debt, but it might also leave you with an additional lump sum to
cover any additional costs or to replace lost income.
Once the mortgage is covered you may choose to take out further policies to
protect your family. These policies will usually be either level term policies
that provide an agreed lump sum in the event of a payout, or a family income
benefit policy, which provides smaller regular payouts to replace a lost income
from a family member.
How much?
One of the approximate equations used to calculate a maximum sum assured is
15 times the annual salary. This will often be sufficient to cover the lost
income of a money earner within the family. For people closer to retirement,
an equation of 10 or even just 5 times the annual salary is often sufficient.
Practicalities
Before you buy life insurance, shop around to find the right policy for your
circumstance. The priority must be the most suitable policy at the most competitive
price.
If you decide to replace existing cover, make sure the new policy is up and running BEFORE you cancel the old plan. Think carefully about the term of cover – this might be up to retirement or until children are non-dependent, this could be when they are 18, 21 or even mid 20's depending on education plans.
If you have any health or lifestyle risks (existing medical conditions, adverse family medical history, risky hobbies/pursuits) then you will need a specialist broker to help you find the most suitable insurer for your individual risk profile. Comparison sites such as Insurancewide.com will help you identify these.
If you can give up smoking and any tobacco use (including patches) for 12 months, most insurance companies will class you as a non-smoker - this will save you up to 30% on premiums.
Trusts
Consider getting your life insurance policy written ‘in trust’.
Otherwise, for example in the case of divorced families, the proceeds could
go to the ‘wrong’ dependants or you could lose 40% in inheritance
tax. Placing a policy in trust is simple and is usually a free service.
Finally, never withhold information on application forms - any non-disclosure could mean that future claims are not paid. Make sure you know your medical history and give all relevant details to your insurance provider.
Get a free no obligation quote now.
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