Buying life insurance can be a bit daunting. We don't do it often enough to know the intricacies and we can feel pressured to get it right. In this article, we'll cover the main things you should consider and answer the questions you might be asking yourself.
If you're looking for the answer to any of the following questions, you can jump straight to the answer:
- What can a life insurance payout be used for?
- How do I choose the right amount of life insurance?
- How long do I need my life insurance for?
- What type of life insurance should I have?
- Will my life insurance pay out if I'm terminally ill?
- What if I have life insurance through my employer?
- How do I ensure my life insurance money reaches the people I intended?
- How much should I spend on life insurance?
- Are all life insurance companies reputable?
- Are there 'extras' I should look for when buying life insurance?
- How to get the best life insurance at the best price
What can a life insurance payout be used for?
The motivation to arrange life insurance is something that is usually linked to what you want to happen if you die. There are a variety of things people will want the money from a life insurance to do if they die. Amongst these are:
- Paying off debts
- Raising children
- Creating financial security for family
- Funding inheritance tax
It is important that you're clear about what you want to achieve so that the policy you choose doesn't fall short of your expectations.
How do I choose the right amount of life insurance?
Most people find it difficult to work out how much life insurance they need. I always start by thinking about the more quantifiable things, such as:
Mortgage - If you have a mortgage then your latest mortgage statement will tell you how much you owe and how long the debt is repayable for and so that's an easy solution to put in place because you know how much money is needed and for how long.
Other debts - Total up any other debts such as overdrafts, credit cards or loans to understand how much extra cover you may need.
Family - Protecting your family with life insurance will depend on your personal circumstances and what you want to happen if you die. The amount of insurance that you should choose can be tricky, partly because we're more accustomed to thinking about weekly, monthly and annual amounts of money that we earn and spend.
So, how do you work out what your family or partner might need for the rest of their lives with you not around?
You should start with what your family needs to spend in order to maintain their lives without you in the picture. You might need to replace the income that you generate or pay for childcare or other functions that you fulfill.
Then try to think about what costs you foresee in the future - things like school or university fees might be among them. Choosing how long to take out the life insurance policy (often referred to as the policy term) can be difficult, but consider how long it will take for all your children to become financially independent. If an adult is not working or generating an income, would this continue and how long would it continue? Essentially, all families are different and have different priorities. Read on for a type of insurance that is designed specifically for families.
Do remember to think about how the value of money changes over time. What you think will be enough today, might not be enough in 10 years. Consider index-linking your life insurance so that the potential payout increases with inflation. It will increase your monthly premium each year but the payout will increase too meaning the value won't be eroded by inflation over time.
How long do I need my life insurance for?
The duration that a life insurance policy runs for can be anything from 1 year to the rest of your life. A term life insurance policy covers your life for a specific number of years and pays a claim if you die during those years. Choosing the right number of years or term for your policy is key.
Example - if your mortgage runs for another 20 years, your life insurance to protect it should do the same. If there are 10 years left until your children reach an independent age then your life insurance policy should run for 10 years.
First things, first - don't choose a term for your life insurance that is less time than the years you will need it for. People often think that they will simply buy more in the future when it runs out, mistakingly thinking that they will save money. While this might be cheaper in the short term, it will be more expensive as you get older and if your health changes along the way, you might even struggle to get more insurance.
On the other hand, the longer you set your policy term for, the more it will cost you, so taking it for too long can mean you end up spending more than you need to. Sticking to the number of years that you need will also ensure that you stop paying for your insurance when you stop needing it.
Some people want to choose a longer term than they need and are happy to pay more for it. You might want the flexibility to cancel it if you don't need it anymore or continue it. As long as it is affordable and you understand that you're paying more for the flexibility, there's nothing wrong with this.
Remember that you can cancel your life insurance before it ends but you normally can't extend it without applying for a new policy.
If you are thinking of buying life insurance so that the payout can be used to fund any inheritance tax payable on your estate, then you'll probably need to look at a policy called 'whole of life' insurance, as these are policies that run until you die. This is a specialist area and you should take appropriate advice to ensure that you've calculated the correct sum for the inheritance tax that will be due and so that it is separated from your estate. A specialist life insurance adviser* can do this at no extra cost to you.
What type of life insurance policy should I have?
There is a key distinction between life insurance policies that provide cover for a specific number of years, only paying out if you die during those years and those that cover you for the whole of your life, paying out when you die, whenever that may be. The first is referred to as term life insurance and the second as whole of life insurance.
- Level Term Insurance - gives you a lump sum that stays the same throughout the time that you're insured for. This means that if you die within the number of years you set, the insurer pays out the set amount of money that you are insured for. You could choose this to cover debts or your family.
- Reducing/Mortgage Life Insurance - pays out an amount of money that will reduce over time, usually in line with a repayment mortgage if you die within the policy term. It's usually only applicable to a repayment mortgage.
- Family Income Benefit - pays out a set income each year from the point of the claim/death until the end of the policy. It's a great solution for protecting your family or a partner as they may find the thought of a regular income over time easier to manage, rather than receiving a lump sum of money up front. It's also easier to match the amount of insurance to what will maintain your lifestyle.
- Whole of Life Insurance - pays out a lump sum of money whenever you die. This type of insurance doesn't have an end date so it will eventually pay out. It's usually only needed if you want to make provisions for a potential inheritance tax bill upon your death. Sometimes, it can simply be used to leave a sum of money after you die. The fact that it will eventually pay out is reflected in the cost.
- Over 50s Life Insurance - pays out a lump sum of money when you die, however, some policies will not pay out if death occurs in the first year. This type of insurance is usually appealing to those who have health concerns because it doesn't ask about your health and this is reflected in the cost. It is often arranged in order to provide the money necessary to cover funeral expenses.
Will my life insurance pay out for terminal illness?
Most decent life insurance policies include Terminal Illness Benefit as standard. It pays out if a doctor can confirm that you are likely to die within 12 months. You could say that it is an early death payout because it pays out the death claim when it is confirmed that death will happen, instead of waiting for it to happen. It can be vital in those final months of life when you don't want to worry about paying the bills and you could perhaps use part of the payout to enjoy one last family holiday together. You can read more in our article, 'Terminal Illness - How it Works'
What if I have life insurance through my employer?
Employers may or may not offer life insurance as part of your remuneration package and so it is definitely worth checking to see if you have any 'death-in-service' benefits. If you are not sure, check with your HR team as it should be listed in your benefits package. If you have a death-in-service benefit, then you can view this one of two ways.
- You can rely on that life insurance to cover your needs and just top it up with a policy to cover any additional amount that you need. This will reduce the cost of your life insurance because some of it will be funded by your employer.
- You can see it as a bonus and arrange your life insurance as though you don't have your employer's life insurance. This will safeguard you if your employer removes the benefit or if you change jobs and lose your benefits as a result.
How will my life insurance money reach the people I intended it for?
If you buy your life insurance and don't nominate the people you want the money to go to, it will simply be paid to your estate. Your estate will then be assessed through a process called 'probate', whereby your possessions, home, debts are evaluated for tax purposes, before being distributed to your intended beneficiaries. So, if you breach certain inheritance tax thresholds, your life insurance payout could potentially be reduced by 40%.
However, if you arrange a trust alongside your life insurance policy you can stipulate who you want to benefit with the money. You can even split the money the way that you wish between your beneficiaries to avoid any squabbles. The insurance company pays the death claim benefit to the trust instead of your estate and your appointed trustees will pass these monies onto your beneficiaries. Because the whole process bypasses your estate, the money isn't liable for inheritance tax so you can rest assured that all the money will reach your beneficiaries.
How much should I spend on life insurance?
Keep your life insurance within a monthly cost that is easily affordable to you. Speak to a specialist life insurance adviser and be upfront about what you want to spend. They'll help you to tailor your insurance so that you're maximising your insurance for what you can spend. If you can afford more in the future you can look at it again.
Here are a few tips:
- Try to keep in mind that you'll probably be paying the price you agree to for the duration of the policy.
- It's not an investment, so you're not going to get the money back if you don't die during the term. (unless you've bought an investment-linked product)
- The older you get, the more expensive life insurance is, so if you have a mortgage, debts or a family that relies on your income then you should act sooner rather than later
- It doesn't work like car or home insurance where things could get cheaper by taking advantage of no-claims discounts and with prices becoming more competitive over time.
2 key things that might make your life insurance difficult to arrange again in the future:
- Life insurance prices are worked out using your age - the older you are when you buy it, the more expensive it is.
- If your health changes for the worse then not only could you be charged more, but you might even be declined for more insurance.
Are all life insurance companies reputable?
Here are a few things to look for when it comes to the company you choose to buy your life insurance from:
- Household brands - you may feel more comfortable buying from a brand that you recognise but remember that some specialist insurance companies may not have the same marketing budgets as the big companies but still provide good options.
- Defaqto rating - issued in stars with 5 stars being the highest. This rates the quality of the product and the company you're buying from.
- Claims statistics - not all companies make these available but where they do, you can see what percentage of claims were paid and reasons why some were not. (Remember that there will always be some claims that are declined because a small number of people don't tell the whole truth when they apply)
Still not sure? - buy through a specialist life insurance adviser. It won't cost you any more.
This way, you've got someone on your side to ensure that you're being treated fairly by the insurance company. We've experienced the difference that an adviser or broker can make when it comes to everything from reinstating a direct debit that has lapsed to making a death claim.
If you buy an insurance policy directly from an insurance company or through a comparison site, they often won't take responsibility for making sure you've chosen the right options - the onus is on you to make the right choices for yourself. However, a regulated adviser has to show why they recommended a certain product and can be held responsible by the Financial Conduct Authority if they have not. We explain more about why we would recommend using an experienced life insurance specialist below, as well as how to get up to £100 cashback when you take out a policy.
Are there 'extras' that I should look for when buying life insurance?
There certainly are and they can add real value to your insurance. Increasingly, life insurance companies are adding tangible benefits at no extra cost to their policies. Services you may be able to access include:
- Virtual GP Access - provides telephone or video call access to a GP service
- Second Medical Opinion - provides you with access to the best doctors to gain a second opinion on diagnosis/treatment
- Mental Health Services - provides counselling for bereavement, relationship breakdowns, PTSD, debt and addiction.
- Nutrition & Fitness Programmes - provides access to advice on how to improve your health through your diet and exercise regime
You might use these benefits even if you never need to claim against the policy. The policies that include them don't necessarily cost more.
How to get the best life insurance at the best price
Having read this article, you may feel that you know enough to confidently choose life insurance for you and your family. However, it may also leave you feeling that there is a lot to consider and get right. You're not alone! Specialist life insurance advisory companies exist because a lot of people need guidance to buy these sorts of products.
We would recommend that you speak to a life insurance specialist* to ensure you are buying the best life insurance policy at the best price. An expert adviser will be able to talk you through the application process as well as providing you with invaluable regulated advice - that means that they have to take responsibility for the advice they give you. Additionally, you have the comfort of knowing that they're not tied to any of the insurance companies and work with the whole market so they can choose what is best for you. Additionally, getting advice will allow you to set up the trust to go with your policy, meaning you can nominate your beneficiaries and avoid them having to pay any unnecessary taxes.
To arrange a call, simply complete this form* and they will be in touch. You'll also qualify for up to £100 cashback once you've arranged your policy.
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