When moving through life, it’s best not to think about certain things. Illness, self-worth, the mind-blowing convenience of the universe even existing. Death is another one. We’re all going to die someday, but if you stop to actually think about it, you can easily find yourself stumbling into a rabbit hole – one that can be pretty difficult to climb your way out of.
That might be why life insurance is a less popular policy than others in the UK. According to recent statistics, 63% of people in the UK don’t have life insurance, with a third of that number over 50 years old. But while the end of your life is a difficult subject to ponder over, that doesn’t mean you shouldn’t be prepared.
Sometimes thinking ahead is all you can do to protect yourself and your descendants from financial trouble. Of course, deciding to get life insurance may be a little uncomfortable at first, but once you have such a policy, you can live happily in the knowledge that your family is protected should the worst happen – a short amount of discomfort is nothing compared to a long period of confidence and assurance.
As a trusted financial advisor in Bristol, then, we’d ask you to sit back, take your time, and read through this article on life insurance – including what it is, why it’s important, and the signs that might be telling you to consider it.
What is Life Insurance?
Life insurance is a contract between a company and an individual that ensures beneficiaries are paid lump sums or regular payments upon your death. The amount of money that will be paid depends on the type of premiums that you buy. It is up to you to decide how the money is paid out and what payments it will cover – including rent or mortgage – or whether it will be left to the family as an inheritance.
What are the Different Types of Life Insurance?
There are two main types of life insurance that you can get. One of them is known as ‘term life insurance’, which runs for a fixed period – most commonly ten, twenty, or thirty years. The other is known as ‘whole of life insurance’, which will pay out so long as you keep up with your premium payments – and can help towards a funeral or IHT planning. There are three versions of term life insurance that you can get. These include:
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Level
This pays a lump sum to beneficiaries within an agreed term, and the level of cover remains the same.
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Decreasing
Designed for repayment mortgages, this version of cover reduces year-on-year and is generally considered to be a cheaper option.
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Increasing
Unlike the previous version of life insurance, this version increases over the term of the policy, ensuring that payouts are anti-inflationary.
Other less common kinds of life insurance include ‘joint life insurance’ – which pays out upon the first death in a relationship for the surviving partner – ‘over 50s life insurance’ – which guarantees coverage for older people without medical checks and covers pre-existing conditions – and ‘critical illness cover’ – which can be an add-on or a standalone policy, providing early payouts for those with critical illnesses.
Of the two main types of life insurance, the most popular form of life insurance tends to be term life insurance. While whole of life insurance has its benefits, they are typically more expensive and – because there’s the possibility that you’ll live longer than you thought – you could end up paying more to the insurance company than your beneficiaries get paid out.
Why is Life Insurance Important?
There are plenty of reasons why life insurance is important, with one of the most significant being the financial security that it brings. When you die, you want to make sure that your loved ones are protected, especially if they have been depending on your income or live in a house under your mortgage pay plan. With life insurance, your family has the means to pay that mortgage, afford childcare, continue going to school, eliminate debt, or preserve a family business.
There are also several tax advantages. For instance, the lump sum is not liable to capital gains tax or income tax, and you also have the opportunity to put your insurance into a trust, giving you more control over who benefits. Of course, a trust isn’t the perfect answer to IHT – which you’ll still be liable for if your estate exceeds the threshold of £325,000 – but they can have significant advantages when it comes to protecting and controlling your assets.
Signs You Need to Consider Life Insurance
There can be a few signs you need life insurance. One of the most obvious is your age. While many people in the UK have cited the expense as a key factor in not getting life insurance, another key factor is the belief that life insurance doesn’t apply to them. But one of the biggest myths about life insurance is that you should be over 50 before you consider getting it. In fact, the longer you wait to pay for a policy, the more you can expect to pay for it. Between the ages of 18 and 30, for instance, £175,000 of life insurance cover for a 10 year term will typically cost around £2.95 a month. That number jumps to nearly £20 a month if you’re over 50, and reaches around £40 for over 70s.
Taking out life insurance when you’re young and in good health is far less costly than starting a policy later in life, but that’s not to say it’s a must. One strong sign that you should consider life insurance is if you’ve just moved in with a partner, or you’ve just had children. These are the people that might suffer after you die, even if you’re a non-working parent – childcare will still need to be paid for and your surviving partner would likely need to cut their hours.
Another sign to consider life insurance is if you’re planning to buy a home. To buy a home, you’ll need a mortgage, and most mortgage providers in the UK will require you to take out life insurance to cover your debt if you die. Just think, if you don’t have life insurance, it’s your dependents who will have to pay the mortgage, and if they can’t do that, then the provider will be left with no option but to sell the home. As we mentioned before, a decreasing term life insurance policy – one of the cheaper versions of term life insurance – would be the best choice in this instance, as you can arrange payouts to decrease in line with your outstanding mortgage.
Other Signs to Consider Life Insurance
If you’re changing jobs in the foreseeable future, this can also be an opportunity to review your situation. Right now, you might be working for an employer who offers death-in-service benefits, ensuring that a beneficiary will be paid a lump sum if you die while still working for the company. This is typically a multiple of your salary. Say, for instance, you earn an average UK salary of £28,000 per annum, if you were to die while still in service, your beneficiary could receive £84,000. If you’re leaving your job, however, you should be checking what benefits the new employer offers. If they don’t offer death-in-service benefits, then life insurance could be your best option to replace it.
Akin to this, it’s important to note the type of policy you have if you receive a raise. If you suddenly make more money and have a better standard of living, then your expenses are likely to increase – certainly far more than they were when you first started earning. In order to keep up with this, you’ll need to raise the cover of your current premium and ensure it reflects your current income. The idea is to replace your income, after all, so your family can continue to be financially stable in the event of your death.
Passing on Your Wealth
Another sign to get a life insurance policy is, quite simply, the accumulation of wealth. If you have worked hard to build your assets and you’re now a high-net-worth individual, there’s likely a desire to keep that wealth in your family and pass on your estate to future