It can be difficult to know whether you are in need of a life insurance policy. There are so many different factors to consider that taking out a policy, at the right time, and in the right circumstances can be a difficult task. In general, single people with no dependants do not need life insurance, nor do older people whose children have long since left home. However, some older people like to take out a small life insurance policy to cover the cost of their funeral, or to cover the cost of an inheritance tax bill.
If you don’t have anyone who relies on you financially then the decision not to take out life insurance is an easy one. However, there are other circumstances you can find yourself in where the decision whether or not to take out a life insurance policy is not so clear cut.
If you and your partner are both in employment you might suppose that your partner could manage financially in the event of your death. However, in the absence of one partner the majority of regular expenses, such as mortgage or rental payments, would stay the same making it very difficult for the surviving partner to manage alone. In this case life insurance would prove beneficial.
If you are a stay-at-home parent who does not work outside of the home then you may assume that life insurance is not necessary. This assumption, however, could cost you dearly as your death could still have a huge impact upon the family’s finances. If you were no longer around to care for your children could your partner afford to give up work, and if he or she couldn’t afford to give up work could they afford the cost of a childminder or full-time nanny? If the answer to these questions is ‘no’ then life insurance would definitely be a good idea.
Many people often assume that if they have death-in-service cover via their employer they do not need to take out a life insurance policy. Death-in-service cover pays out a tax-free sum if you die whilst employed by the company; often around four times the amount of your annual salary. This benefit is obviously of value, but is no real substitute for a full life insurance policy which usually pays out a far greater amount.
Many financial advisors recommend that you take out life cover equivalent to ten times your annual salary. If you have death-in-service cover then you need to factor this in when calculating how much cover you require as the more cover you have, the higher your premiums. Bear in mind also that death-in-service cover will only pay out as long as you are still employed by the company, therefore if you leave you would need to take out cover elsewhere in order to provide your family with financial protection in the event of your death. In addition, some death-in-service policies do not allow you to nominate the beneficiaries, instead the money is paid into a discretionary trust. You also cannot normally link this type of cover to a mortgage. In short, although death in service cover is valuable it is no replacement for a full life insurance policy should you need one.
If you are the sole breadwinner for your family then life insurance is obviously a vital purchase as without your earnings your loved ones would be unable to pay for outgoings such as mortgage payments and bills, and thus be unable to maintain the standard of living that they enjoyed when you were still alive.
When you have determined whether or not you need life insurance you then need to decide what sort of policy best suits your requirements. The most popular type of policy is level term insurance which pays out a fixed amount should you die within the term of the policy. You can also purchase decreasing term insurance where the pay-out gets smaller as the years go by. This type of policy is usually linked to a repayment mortgage as the amount owing decreases over time.
Other types of life insurance policy are also available including family income benefit, and whole of life cover. Family income benefit pays out a monthly income to your dependants during the term of the policy rather than a lump sum. Whole of life cover pays out a fixed sum when you die as long as the policy is still active. Basically, this type of policy lasts as long as you do so your family is guaranteed a payout at some point. Whole of life cover is generally the most expensive.
When you take out life insurance it is important that you review the cover you have in place on a regular basis. Your circumstances can change quite considerably as you grow older, and you may find that you need more, or less cover in the future.
Sometimes it is easy to figure out whether you need life insurance, but if you are at all unsure it certainly pays to speak to an experienced financial advisor, or insurance broker, who can assess you needs and requirements in full and advise you accordingly. This could save you a considerable amount of time and money in the longer term.