Do I really need life insurance?
Posted on 16th February 2022 at 11:53
Life insurance is a policy that pays an agreed sum of money to a named person if you die. It’s to make sure that your loved ones are financially secure if the worst happens. The money can be used to cover expenses like paying off your mortgage and give them one less thing to worry about in a difficult time.
Do I Need Life Insurance?
If you’re asking the question, the answer is probably yes. If anyone relies on your income then you should have life insurance. That could be to pay a mortgage, cover debts, or even just pay for day-to-day income. Even if you don’t have a mortgage or any debts, insurance could cover funeral expenses and give your loved ones a financial safety net.
Even if you never need it, insurance gives you and your family peace of mind that if the worst does happen, they won’t need to worry about money.
Do I Need Life Insurance for a Mortgage?
In the UK, there’s no legal requirement to have life insurance for a mortgage - but you really should. Some lenders require it as a loan condition but even if they don’t, it’s a good idea. If you live with people it means they won’t need to worry about paying the mortgage if you die. Even if you live alone, it means the mortgage debt won’t pass to your next of kin. And it’ll cover your funeral expenses, which can mount up quickly.
What Does Life Insurance Cover?
There are lots of different policies out there, but generally, life insurance will pay a lump sum to a person or people of your choosing. They can choose what to do with it but most will pay off debts and mortgages and things like funeral costs.
You should also check exactly what events your life insurance covers. Some policies have extra benefits like a partial payout if you’re taken critically ill. They could also have exclusions if you die from things like pre-existing conditions.
It’s important that you do your research and understand exactly what the policy you’re signing up to includes. Speaking to an independent insurance expert is highly recommended. They’ll be able to help you pick the perfect policy for your situation.
Can I Have More Than One Life Insurance Policy?
Yes, you can have more than one life insurance policy. You can have separate policies to cover different financial needs for your dependents, such as income replacement, debts, and other specific expenses like children’s education. It can be a good way to get exactly the coverage you need.
Having several policies can also be expensive, and you might be able to combine everything you need into a single policy more efficiently. If you’re not sure of the best course of action, you should speak to a specialist insurance advisor.
Is Life Insurance Worth It?
Yes. Absolutely. Even if you never need it (and let’s be honest, we’re all hoping that we don’t) it gives you and your loved ones peace of mind. Knowing that if something terrible does happen your family will be financially secure is invaluable.
And of course, if the worst does happen, your life insurance will be worth every penny you’ve paid and more.
Is Life Insurance Taxable?
The simple answer is no. The payout from your life insurance is not taxed. But if it’s part of an estate then there may be inheritance tax to pay. Putting your policy into a trust can help to avoid this, and make sure your loved ones get the full amount.
If you’re not sure of the tax implications of your life insurance policy you should speak to an independent advisor. They’ll be able to help you work out what’s best for you and your family.
How Does Life Insurance Work?
Life insurance works like any other insurance. You pay a regular premium to the insurance company and if you die they pay out an agreed sum to designated people (usually your family or loved ones).
There are several different types of life insurance policy, all of which work in slightly different ways. It’s worth knowing about these so you can choose the right one for you.
Term life insurance
This kind of insurance covers you for a set period. It’s often taken out to cover a loan or mortgage - so it covers the term of the loan. There are three kinds of term life insurance.
Decreasing term life insurance
The amount paid out if you die gets smaller over time. This is the type of cover you’d usually get to cover a mortgage. As the amount of mortgage you need to pay back gets smaller, so does the amount of payout you’ll receive.
Level term life insurance
The amount paid out if you die stays constant over the full term of the insurance.
Increasing term life insurance
The amount paid out if you die increases over the term of the insurance. This can either be linked to inflation or a fixed rate.
Whole of life insurance
This covers you for the rest of your life, not just for a specified period. It’s good if you want ongoing cover without having to take out new policies every time one expires. It’s usually more expensive than term insurance for the same size payout. You may also be able to secure a loan against the value of your whole life insurance.
Joint life insurance
Joint life insurance covers both you and your partner, and makes sure if one of you dies the other (along with any dependents like children) will be financially secure. Once one of you has claimed the policy will end - if you still want to be covered, you’ll need to take out another policy.
Critical illness cover
Critical illness insurance covers you if you’re taken seriously ill. It can help cover expenses if you’re too ill to work or to pay for medical expenses. It’s usually an addition to a policy but it can’t normally be added to an existing one - you must take it out when you start the policy.
Terminal illness cover
If you’re diagnosed with an illness you’ll die from in the next year this cover will pay your family a lump sum.
How Much Life Insurance Do I Need?
The level of life insurance you need depends on your financial situation. You’ll need to think about your income, debts, any upcoming financial obligations and the needs of anyone who depends on you financially. Around 10-15 times your annual income is a common rule of thumb but that should only be a starting point. If you’re not sure how much coverage you need, speak to an independent insurance advisor.
Should I put my Life insurance policy in trust?
The advantage of putting your life insurance in trust is that the payout will go directly to your beneficiaries. This can speed things up so your loved ones get the money as quickly as possible. It can also have tax benefits.
Conclusion
Life insurance is an important part of financial planning. It gives you peace of mind that if you die unexpectedly, your loved ones will be financially secure. It’s important that you understand what you need from a life insurance policy, and the best way to do that is to speak to an independent insurance specialist.
If you’re not sure whether you need life insurance, or you can’t work out which policy is best, drop us an email. We’re always happy to have a chat.
Tagged as: Insurance, life insurance
Share this post: