When you're buying a house or if you're already a homeowner, make sure you investigate whether you need life insurance or not. We explain how life insurance works, the different types and how much it costs.
What is life insurance?
Life insurance offers a financial safety net for your family if you die. Your loved ones will get a tax-free lump sum if the worst happens and they may use it to pay off the mortgage and cover other expenses. Life insurance is also known as life cover.
How does life insurance work?
When you take out a life insurance policy, you’ll pay monthly premiums. Then if you die, your beneficiaries will be paid the amount of cover in your policy. Life insurance policies will usually also pay out if you’re diagnosed with a terminal illness and given a year or less to live.
What can life insurance pay for?
There are no restrictions on what life insurance can be used for, that’s up to the beneficiaries. But common uses are:
Paying off the mortgage
Paying off credit card balances, car loans and other debts
Covering day to day living expenses
Paying for children’s school fees or university costs
Who needs life insurance?
Life insurance is suitable if you have:
A partner who relies on your income
Dependants such as school-age children
If your family lives in a house that you pay the mortgage for
Who doesn’t need life insurance?
Not everyone needs life insurance. For example, if you’re single and have no dependants, term life insurance might not be the right cover for you. You might find that critical illness cover gives you all the protection you need.
If you have life insurance cover through your employer, you may decide you don’t need to take out a new life insurance policy. Although, remember that if you stop working for that employer, you’ll no longer be covered under their policy.
Types of life insurance
When you take out a life insurance policy, you can choose from three different types of cover:
Level term: The amount of cover and your premiums stay the same throughout the term. For example, if you have a level term life insurance policy worth £200,000 over a 25 year term, the payout will be £200,000 whether you die in year 1 or year 24. There are lots of reasons why you may choose this type of cover, including if you have an interest-only mortgage.
Increasing cover: The amount of cover goes up each year by a pre-agreed amount on the anniversary of taking out the policy. This is to protect your loved ones from the rising cost of living in future years.
Decreasing cover: The amount of cover drops over time in line with your mortgage if you have a repayment mortgage, although the premiums remain the same. This is also known as mortgage life insurance.
This type of life insurance is technically known as ‘term life insurance’.
What are the benefits of life insurance
The main benefits of life insurance are:
If offers financial protection for your loved ones if you’re no longer around. It could mean the difference between your family being able to stay in the family home or having to sell it if they can’t afford the mortgage without your income.
Peace of mind: You’ll have the security of knowing you have a plan in place in case the worst happens.
Flexibility: There are different options available at different prices.
How much does life insurance cost?
According to Compare the Market data, the average cost of life insurance is £9.35 per month.
However, the amount you’ll need to pay for life insurance will depend on a number of factors, including your:
Age: The older you are when you take out a life insurance policy, the more expensive your premiums are likely to be. This is a benefit of taking out a life insurance policy when you’re younger.
Smoker status: If you smoke, your life insurance premiums will be higher.
Lifestyle: If you lead an unhealthy lifestyle, such as if you’re a heavy drinker or overweight, you’ll normally pay higher premiums.
Your health: Having a pre-existing medical condition can affect the price you pay.
Family medical history: Insurers may ask you whether your parents or siblings have a history of a serious medical condition. This may increase premiums in some cases as there may be a greater risk of you suffering from the same condition
The amount of cover: The bigger the payout you require, the higher your premiums will be.
Occupation: If you have a high risk job, the higher your premiums will be.
Life insurance costs examples
Here are some examples of how life insurance costs may vary depending on the amount of cover and whether you choose level term or decreasing cover (mortgage life insurance).
For example, a 30 year old non-smoking, office worker with no health or lifestyle disclosures may pay the following guaranteed premiums:
While if the same person above is a smoker, they may pay the following guaranteed premiums:
How much cover will you need?
To get an idea of how much cover you’ll need, you should:
Add up all the expenses you’d want to cover such as paying off your mortgage and any other debts, as well has perhaps setting some money aside for monthly expenses.
Then subtract the amount of money your family could use to cover these such as from savings, another family member’s income and any death in service benefit.
However, getting a figure that’s right for you may seem complicated to work out. So it’s a good idea to speak to an expert who can crunch the numbers for you.
What’s the average life insurance pay out?
The average life insurance pay out in 2023 was £80,403, according to figures from the Association of British Insurers.
How do I buy life insurance?
It’s advisable to shop around for life insurance. By all means get a quote from your mortgage lender or broker, but shop around to compare policies like for like. Different providers will offer different levels of cover at different prices. So make sure you do your research.
Should I get joint life insurance with my spouse?
If you’ve got a spouse or partner, you can choose from getting a joint life insurance policy or two single life insurance policies.
Joint life insurance policies can work well for people who live together, share financial responsibilities and want to take out a similar level of cover. And it is usually cheaper than taking out two single policies. But joint life cover usually works on a ‘first death’ basis. So when the first person dies, it will trigger an insurance payout and the policy will end. The surviving partner will need to take out a new policy if they wish to be covered.
By comparison, getting two single policies means each partner is covered separately. You’ll each have your own policy which you’ll pay premiums on.
Which is best for you will depend on your circumstances. For example, if you want different levels of cover you may opt for single life insurance policies. While if you have a joint mortgage with a partner, you may opt for a joint life insurance policy, but if you have children from a previous relationship, you may choose to take out a single life insurance policy as well.
Who gets the money when you die?
If you have joint life insurance, the money will typically go to the surviving partner – the other policyholder – when you die, unless you’ve made other arrangements.
While if you have a single life insurance policy, the money will go into your estate. So it’s important to make sure your wishes are known.
What is family income benefit?
Family income benefit is a type of life insurance designed for parents and families. Instead of giving a one-off lump sum when you die, it gives them tax-free payments each month, although you can arrange for payments to be made yearly or quarterly.
Many people take family income benefit out alongside a standard life insurance policy. But you can take it out as a standalone policy.
Pros and cons of family income benefit
Advantages of family income benefit include:
It’s usually more affordable than a standard life insurance policy
The money is paid monthly so it can be easier to manage than a big lump sum
However, disadvantages of family income benefit include:
Payments are only made until the end of the policy term, so if you die towards the end of the term the payout may only last a short period of time.
You can’t pay off major costs like your mortgage in one go.
Whole of life insurance policies
A different type of life insurance you can take our are ‘whole of life insurance policies’. These policies guarantee a cash sum if you die, whenever it occurs, as long as you keep up with your payments. This means they’re more expensive than a term life insurance policy, which are for a fixed period. This is also known as life assurance.
Whole of life insurance policies are often used to help towards funeral expenses. Some people also take out life insurance policies designed to pay an inheritance tax bill. This means your beneficiaries can avoid inheritance tax fees having to be paid in a hurry.
Over-50s life insurance
Over 50s insurance is a type of whole life insurance and will pay out a tax-free sum of money when you die. You’ll need to be older than 50 to get it and usually younger than 85 (although this varies by insurer).
When you take out Over 50s life insurance, the insurer won’t check your medical history so they can be a good option for people who struggle to get other types of insurance like life insurance or critical illness insurance due to health conditions.
But the added risk means you’ll pay higher premiums for a lower amount of cover. And many insurers won’t pay out during the first 12-24 months or even longer. And you could end up paying in more than you get out.
How does a beneficiary make a claim?
When you die, your beneficiary should contact the insurance company as soon as possible. There’ll be some paperwork involved, for example, they’ll need to send the death certificate, or a certified copy, to the insurer to start the claim process.
How long does it take to get a life insurance payout?
There are no set timeframes for life insurance payouts but most life insurance payouts are settled within 30-60 days, according to Quick Quote Life Limited. However, there can be delays for example if the insurer needs to carry out some level of investigation into the death.
How many life insurance claims are paid out?
Some 96.7% of new life insurance claims were paid in 2023, according to statistics from the Association of British Insurers. Reasons for not paying out include if you weren’t up front about your health. For example, LV= says, ‘We won’t pay on some plans or may reduce the amount we pay if the person insured did not fully answer the questions we asked about their health or lifestyle.’
Do I need life insurance for a mortgage?
No, you don’t need to take out life insurance for a mortgage. But buying a house is often the trigger for people to take out life insurance so that the mortgage can be paid off if they die.
Do I need life insurance if I’m renting?
For most people, buying a house is the trigger for buying life insurance. But if you’re renting, it’s important to consider it too, especially if you have dependants because it could offer them financial security if you die.
Do you need to pay cancellation fees?
Some policies contain cancellation fees so make sure you read the terms and conditions properly.
What is mortgage life insurance?
Mortgage life insurance is the same as decreasing term life insurance. With these life insurance policies, the amount of cover goes down each year in line with the outstanding balance on your repayment mortgage. However, you’re not obliged to use any payout to pay off the mortgage.
Article from HomeOwners Alliance Angela Kerr Director, Editor
Comentários