Life insurance is more than just another insurance policy. It is your family’s key to a financially stable future should you die unexpectedly, leaving behind a partner and children who would otherwise be left adrift without your monthly income. When buying a policy, there are several key questions you need to consider.
How much life cover do I need?
Unfortunately there is no magic formula to determine the level of cover that your dependants would need in the event that you die early. This may also be dictated by how much you can afford in monthly premiums – the higher the cover, the more costly the policy will be in the here-and-now.
When arranging a life insurance policy, you need to consider several factors. As your home is probably your greatest asset, are you seeking to pay off your mortgage so that your family isn’t left with the responsibility of covering the payments without you or, in the worst case, having to sell up as the mortgage is too expensive? Check whether any other policies you have protect your home, as mortgage lenders are often keen to sell their own insurance products when agreeing a long term loan.
You also need to consider the other expenses your family might struggle to meet in the event that you pass away. If you have any existing debts, remember that these will not be written off after your death and your estate will become liable. If you die, will your partner be able to work if you have children who need care? How much money would your family need for daily living, without their quality of life being adversely affected? Will your children be able to attend university?
While it is sometimes difficult to estimate exact figures, taking these points into consideration will help you to calculate an approximate figure that will determine the size of the lump sum payment your family would need.
Level or decreasing term?
Life insurance policies generally operate in two ways. Level-term cover will pay a lump sum should you pass away during the term of the policy. You’ll pay in the same amount on a monthly basis and should expect the lump sum payment to be the same, whether you die in 1 year or 20 years.
Decreasing-term policies pay a lump sum too, but the amount will be determined by how long is left on the policy. So if you die sooner rather than later, you could expect a higher payment, but if you pass away only a year or two from the end of the policy term, then the payment would be substantially smaller. These policies are suited to protect a repayment mortgage where the amount owed decreases over time.
How long should the policy run for?
Again, this depends on your personal circumstances. Consider why you are taking out the policy, as this will help you to decide. If you are covering the cost of your mortgage, then you may wish to policy to expire when the mortgage is settled. If you are concerned about your family’s income while your children are young, you may feel it is unnecessary to continue a life policy when they reach adulthood.
You also should consider your future income, in particular when you plan to retire and how lucrative your pension will be, as there may come a time when a large lump sum payment is simply not required.
What if I become critically ill?
Many life insurance policies will pay out if you are diagnosed with a terminal illness and have limited time to live. But critical illness can strike at any time, often without being terminal, yet you would potentially be unable to work in this situation. You may, therefore, wish to explore a critical illness option when arranging life cover, for the ultimate in peace of mind.