What is life insurance?
Life insurance is a type of personal insurance policy that covers the insured person in case they die and pays out a cash lump sum of money or a regular income in the event of a claim. Life insurance can provide cover for the whole of your life so that it pays out when you die (Whole of life insurance) or it can simply cover you for a period of time that suits you (Term life insurance).
To understand the different types of life insurance and which may suit your concerns, you should read our article, "Types of life insurance explained".
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Should you buy life insurance?
Most people require a type of life insurance at some point in their lives and it is usually as a consequence of taking on a responsibility that would require a cash sum to meet should they die prematurely. However, it can be confusing to work out when you should think about buying life insurance.
We have listed the following questions to help you work out whether you should buy life insurance. If you answer yes to any of the following questions then you should consider speaking to a life insurance specialist who can discuss your circumstances free of charge and with no obligation to buy a life insurance policy.
7 questions that help you decide if you should buy life insurance
1. Do you earn an income that others depend on?
If your death will cause financial loss that cannot be replaced by other means, you should consider buying life insurance. The most common situation where this kind of need exists is within a family where one or more family members generate an income that supports the living costs. The death benefit from a life insurance policy can provide financial security to replace income and support continuing costs such as rent or mortgage payments, utility bills, clothing and childcare as well as create some security for future expenses such as university fees and retirement in the event of your death.
2. Do you provide free care that would otherwise need to be paid for?
Anyone who cares for children or a dependent adult should consider buying life insurance if that care would need to be funded in the event of their death. It can be easier to see the financial loss caused by the death of someone who earns an income but the death of a carer can have very similar financial repercussions. For instance, a family where one person is working but the other is raising young children may have to adapt if the carer dies. Oftentimes, the earner may take on the caring duties and suffer a loss of income as a result. Alternatively, they may choose to continue to work and pay for the additional care provided by a third party. Either way, the death benefit can fund such changes by providing financial protection and preventing financial hardship.
3. Do you have debts?
If you have debts such as a personal or student loan, mortgage, credit card or other personal finance agreement, you should consider whether these could be repaid if you died. If your debts cannot be funded by any other reasonable means in the event of your death, you should consider purchasing life insurance so that the death benefit can be used to pay these off. If there are assets that can support the repayment of your debts without causing financial hardship then you may not need to consider life cover but you may choose to do so in order to retain the assets within your estate.
4. Do you want to make money available to pay for your funeral?
Funeral costs are a common worry and life insurance can ensure that there will be sufficient funds to take care of the arrangements when you die. Usually, the money will be needed quite quickly and as long as you buy the right type of life insurance and nominate a beneficiary, they should be able to access the payout readily to ease any financial worries. There are specific life insurance policies for this purpose which are referred to as 'funeral plans' or 'over 50s life insurance'. You can read more about life insurance that can cover your funeral costs in our article, "Which is the best over 50s life insurance?"
5. Will your estate be liable for inheritance tax when you die?
If your estate exceeds the current threshold for inheritance tax (£325,000) then there may be a 40% tax that has to be paid against the value that exceeds the threshold before it can be passed to your beneficiaries. Of course, some people are happy for the tax to be paid from their estate while others choose to create a fund for all or some of the estate taxes that could be due through a 'whole of life' insurance policy. This is a slightly complex area so it is useful to speak to a specialist life insurance adviser* to ensure that you're making the right choices for your particular circumstances.
You can work out your inheritance tax liability and read useful information in our article, "How to calculate inheritance tax and our free IHT calculator"
6. Are you a shareholder within a business?
Shareholders within businesses should consider a few things to determine whether they may need to buy life insurance. Life insurance can create the means to allow other shareholders to buy back shares from a deceased shareholder's beneficiaries helping them maintain control of the business but this does have to be supported by legal agreements. Do read our article, "What is shareholder protection insurance? – complete guide on the benefits and costs".
7. Are you a key person within a business?
Businesses often rely on the skills, experience, contacts and vision of key people, without whom revenues and profits could suffer. It can cost a lot of money to replace a key person and life insurance can fund this if the worst were to happen. Essentially the business would buy the life insurance policy so that if the key person died, the insurance company would pay the death benefit to the business to use as necessary. You can read more in our article, "What is keyman insurance – How much is it and who should get it?".
How to buy life insurance and get up to £100 cashback
There are a number of different ways to buy life insurance but it is sensible to use a method that will answer your questions and direct you to the most appropriate life cover solutions for what you need.
Comparison sites are usually a good way to get a sense of how much a life insurance policy will cost but most do not help you to make decisions about how much cover you need and which type of life insurance policy to buy. They are usually limited to the simplest types of life insurance policies and may only compare life insurance premiums from a handful of insurance companies. If you have any health conditions or have had to see your doctor about a health concern in the past, comparison sites are generally quite unhelpful in finding the best life insurance company to keep your costs as low as possible. You can avoid paying premiums that are too high for your budget by sourcing an insurance company that has a more lenient stance on your specific health and lifestyle.
The best way to buy your life insurance is by speaking to a life insurance specialist* where you'll get access to the whole life insurance market including other personal insurances such as critical illness insurance and income protection insurance. So you can be reassured that you're getting the best premium and life insurance coverage. Additionally, the specialists will help you to complete forms that will ensure that if your policy pays out, it will go to the right people and avoid any potential inheritance tax.
As a Money to the Masses reader, you can receive up to £100 cashback if you arrange your life insurance this way.
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. This 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