Many people understand the need to take out a life insurance policy in order to cover a large debt, such as a mortgage, however, many parents are unaware of the importance of having a life insurance policy in place to provide financial security for the family.
It is important for parents (especially parents of younger children) to have life cover in place because the impact of losing a partner or spouse, as well as an income, could be both mentally and financially crippling.
In this article we explain the importance of life insurance for parents, as well as how much cover you should need and which cover is best. We also tell you the best place to compare life insurance quotes to guarantee the cheapest quotes as well as getting up to £100 cashback (and it isn't by using an online comparison site!)
What is life insurance for parents and how does it work?
Life insurance is an insurance policy, paid either monthly or annually that will pay out a set amount of money (often referred to as the 'sum assured') if the insured person dies within a set time period (often referred to as the 'policy term'). Premiums are calculated based on a number of factors including the amount of cover you choose, the period over which you take the cover, your age, your health, your family's medical history, the type of job you do, whether you do any dangerous sports or hobbies and whether you smoke.
There are many different types of life insurance policy available, however, there are specific policies that are more specifically designed to suit parents. We explain the most popular types of life insurance policy below.
What type of life insurance for parents policy should I buy?
Below we explain the most popular types of life insurance policy available, who should consider them and for what reason:
Life insurance policies - Good for paying off debt (and funeral cover)
Mortgage Decreasing Life Insurance
Usually taken out to cover a large debt such as a mortgage. The amount you are insured for decreases each year in line with the debt. Premiums for this type of policy are usually cheaper than 'Level Term' assurance (see below). For more information, check out our article 'Mortgage life insurance, what is it and should I have it?'
Over 50s Life Insurance
As the name suggests, this policy is designed for those over 50 years of age. This type of policy is not underwritten and so applications are guaranteed to be accepted. Premiums are paid monthly or annually and are usually guaranteed and so will not increase over time. For more information on Over 50s life insurance, check out our article 'Which is the best over 50s life insurance?'
Life insurance policies - Good for parents
Level Term Assurance
This is the most popular type of life insurance and can be taken out to cover a large debt such as a mortgage or to provide a lump sum for you and your family (or both). The amount you are insured for remains the same throughout the term of the policy, meaning that you'll always know how much you are insured for; this makes it a popular life insurance option for parents. For more information, check out our article 'How much does life insurance cost?'
Family Income Benefit
A type of decreasing life insurance policy that is designed to reduce as your need for life cover reduces over time. Rather than pay out a large lump sum if you should die, it pays out a guaranteed, tax-free, monthly income of your choosing until the end of the policy term. As the potential payout on a family income benefit policy reduces over time, the quotes for a family income benefit plan are cheaper than level term assurance and so it is perfect for parents on a budget. For more information, check out our article 'What is family income benefit life insurance and should I get it?'
Should both parents have life insurance?
Yes, it would make sense for both parents to have life insurance, even if one parent isn’t earning an income. It is important because if the non-working parent was to die, the working parent would likely have to either give up work completely, reduce their hours significantly or employ someone else to look after the children and each of these scenarios would have a significant financial impact on the family. You may want to consider taking out a joint life, first death policy, which would cover both parents and guarantee to pay out the sum insured should either parent die. This type of policy is often the cheapest way to insure both parents, however, it does mean that the surviving partner is left with no life insurance once a claim has been made.
A better option for most is for each parent to take out a single life policy each, this in effect doubles the amount of cover you have in place and ensures that should either partner die, the surviving partner would continue to be insured. Interestingly, even though two single life policies provides double the cover, the premiums are often only around 20% more than a joint life policy and so it is worth getting some quotes to see what the cost would be. We explain more about where to buy the best life insurance policies for parents later in this article.
How much life insurance do I need as a parent?
This is a tricky one to answer as everyone’s situation will be different. The best way to know for absolute certain is to speak to an independent life insurance specialist as they will be able to ask the specific questions in order to tailor the cover to your specific needs.
There are however some general rules that can be applied in order to work out roughly how much you may need:
Firstly - make sure that your debt is covered, that way, the people who are left to pick up the pieces won’t be burdened with your debt. This includes credit cards, loans, car finance and enough to cover the outstanding amount on the mortgage (if you have one).
Secondly - make sure there is enough to comfortably cover your funeral. A funeral is a stressful situation at the best of times without the additional worry of how to finance it.
Thirdly - you need to replace your income. The policy should be taken out over a long enough period to ensure that your youngest child has finished education and is no longer financially dependent on you. Remember, if you hope or plan for your children to go to university, this can mean taking a policy up until their 26th or 27th birthday, taking gap year’s and advanced degree’s into consideration.
Using these three general rules above you can start to build a rough estimate of the amount of life insurance cover you may need.
Below we have provided a simple breakdown for someone who is 35, has two children (youngest child is 10) and who earns a net income of £2,500 per month
Example: Amount of debt that should be covered by a life insurance policy
Example: Amount of life insurance needed to pay off debt and replace lost income
|Debts||£125,000||Total debt owed including payment of funeral|
|Income||£216,000||Net monthly income of £2,500, minus £1,000 = £1,500 (as debts would be paid off with the lump sum above, so you would no longer need to pay out £1,000 per month on debts) x 12 months x 12 years (taking the youngest child to end of University)|
|Total||£341,000||The amount of life insurance that should ensure that the surviving parent can continue living the lifestyle to which they have become accustomed|
It is worth remembering that most people will need less life cover as they get older, as debts tend to reduce over time and children become less financially dependent as each year passes. The above example does not take this into consideration and so as each year passes you are paying for more cover than you necessarily need. If the monthly premiums are affordable then this is not necessarily a problem, however, there are ways to ensure you are only covered for what you need by taking out a policy that reduces in value over time, such as Family Income Benefit.
How much does life insurance for parents cost?
The cost of life insurance for parents will vary depending on a number of factors, including the amount of cover you need, your age, your health and how long you want to take the cover for. Premiums start at around £5 per month for most insurers, with average premiums tending to range between £10 and £20 per month. For more information on the cost of life insurance, check out our article 'How much does life insurance cost?'. Read on to find out the best way to buy life insurance for parents and how to get up to £100 cashback.
Where is best to buy life insurance for parents?
The best way to buy life insurance for parents is to speak to an independent life insurance specialist, such as LifeSearch* as they can search the whole market for you as well as provide tailored advice. Additionally, LifeSearch can help to complete the application forms, chase the insurance company on your behalf as well as offering up to £100 cashback when you buy a policy. Simply complete this short form* for a callback at a time that suits you. Alternatively, you could use an online comparison site, but remember that online comparison sites cannot provide tailored advice and so you'll need to know the type of cover you need as well as the amount.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article - LifeSearch