Life insurance can offer the peace of mind that your loved ones will be taken care of financially if you pass away.
Life insurance will pay your policy beneficiaries a lump sum or regular payments if you die within the term of your policy. That money could then be used to pay off a mortgage or other debts that you're responsible for paying. It could also help with the costs of household bills, childcare and education.
Do you need life insurance?
If you have people who depend on you financially - a partner or children – it’s worth considering life insurance. But even if you're not the main breadwinner, it's wise to think about life insurance, for example to cover the cost of looking after the children if you weren't there.
How do you work out how much life insurance you need?
The amount of life insurance you need will depend on your personal circumstances such as:
- What expenses you would want your pay-out to cover
- How much you can afford to pay
The more you're insured for the higher your premium will be, and you don't want to have more life insurance than you can comfortably afford. On the other hand, you want to make sure your dependants would be provided for as much as possible.
A way to work out how much life insurance you need is to look at what exactly your insurance payment would need to cover, and how many years your dependents would need support for. Things to take into consideration include:
- Your mortgage or future rent payments
- Any other debts you owe
- Childcare expenses
- Educational expenses
- Replacing your income
You also need to look at any other savings or life insurance policies you have (for example, through your employer) and how they could help. If you are on a low income, consider how a life insurance payment would affect any state benefits your dependants might be entitled to.
What types of life insurance policy are there?
There are several types of life insurance:
- Level term insurance: this type of policy pays out if you die within the period of time it covers (the term). It will pay out the same amount whenever in the term you pass away.
- Decreasing term insurance: this type of policy also lasts for a set period of time, but the amount it pays out decreases as the term progresses. A decreasing term policy is often linked to a mortgage, as the amount you owe decreases over time.
- Whole of life insurance: this type of policy does not have a set period of time and covers you as long as you keep up the premium payments. These types of policies are usually more expensive than term insurance policies. They can be used as part of estate planning or funeral planning.
- Over 50s plans: available only to people over the age 50, this type of policy can help with funeral costs, paying debts or if you want to leave money to beneficiaries when you die.
The type of life insurance you choose will depend on your individual needs. You may also want to look into critical illness cover, which will pay out if you become ill with one of the conditions listed on the policy. If you aren't confident in working out what you need for yourself, you should speak to a financial planning expert.