Is life insurance worth it? – Forbes UK Advisor

Life insurance is designed to pay benefits to your dependents (called beneficiaries) in the event that you die unexpectedly within a specified period of time, called the “term”. Many policies will pay if you are diagnosed with a terminal illness with less than 12 months to live.

But is life insurance worth it? The answer will depend entirely on your situation, your priorities and your personal outlook. Let’s take a closer look.

(There’s a type of cover called “whole life” insurance that pays you each time you die – more on that below – but “term” insurance is the product of interest to those looking to protect someone’s financial situation. their family in the event of premature death.)

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Understand the basics

Life insurance generally pays a tax-free lump sum or monthly income to your beneficiaries if you die during the term of the policy. Whoever receives the money can spend it as they see fit.

However, the payments are usually intended to pay off a mortgage or other debt, cover household bills, and pay for general living expenses ranging from childcare to the weekly store.

Premiums (usually paid monthly to the insurer) are calculated based on factors such as your age, health, occupation and how long you want the policy to be in force. They will also depend on the type of policy you want, which we have explained in more detail below.

Main types of life insurance

Life insurance comes in different forms. You need to choose the type that best suits your needs and those you want to protect financially. Here is an overview.

Term life insurance

With this type of policy, a payment is made if you die within the specified period, which is often 10 or 20 years, but which you can choose at the time of purchase. This is the most common (and cheapest) form of life insurance.

Within term life insurance, there are four subcategories of policies.

  • Decreasing term. This coverage is ideal if you know your financial commitments will decrease over time, as it is designed to pay less as the term progresses. For example, decreasing term life insurance can be set up so that the payment matches your mortgage balance as you pay off more.
  • level term. This type of term coverage pays a fixed amount, regardless of the duration of your death. This is why it can be ideal for those with younger children or larger families. It also works well for those with an interest-only mortgage, where the principal debt remains the same over time. Since the payment is fixed, the premiums for level term policies are higher than those for decreasing term policies.
  • Ascending term. The term type of policy takes into account potential increases in inflation (the cost of living), and so the payout increases by a fixed amount each year for the term. For this reason, it is the most expensive type of temporary coverage available.
  • Family income allowance. Instead of a lump sum, a family income benefit policy pays monthly from the time a claim is made until the scheduled end of the term. This makes the potential payout lower than a lump sum policy, so premiums are lower.

On all term policies, if you survive the stated term, your cover will end and, if necessary, you will need to take out a new policy. There is no refund of premiums if you survive to the end of the term.

Lifetime coverage

Unlike term life insurance, whole life coverage will be paid to your beneficiaries regardless of when you die. You will either have to pay premiums until you die or until an age stated in the policy, say 80, but still have cover until the end of your life.

Because whole life insurance comes with a guaranteed payout, it’s often used to fund funeral expenses or to offset an estate tax bill. Inheritance tax is currently payable at a rate of 40% on assets over £325,000.

It should be noted here that the life insurance payouts themselves count for estate tax purposes, although you can get around this by writing the policy in trust. Your life insurer will explain this to you when you take out your policy.

Because whole life coverage guarantees a payout, premiums are higher than for term life insurance. And, if you opt for a whole life insurance policy linked to an investment fund, your premiums could even increase if it does not perform well.

Is life insurance worth it?

The answer to this question depends on a number of factors, the main one being whether you have someone who relies on you financially. In addition to children or stepchildren, it can be a spouse, partner or even a parent.

Life insurance is a particularly good idea if you have a mortgage that would still need to be paid if your income were to suddenly disappear. But there are other (and rising) costs that should also be considered, ranging from energy bills to council tax to childcare.

If you already have life insurance, certain milestones such as getting married, having children and buying a house may also warrant increasing your level of coverage. While this may result in higher premiums, these must be weighed against the financial security that the appropriate level of cover can provide.

While premiums will depend on a number of factors including amount of cover, type of policy, your medical history, age and occupation, in some cases it could be cheaper than you think.

A quick search on our life insurance comparison tool, for example, shows that £200,000 of tier term cover for a single applicant aged 30 costs less than £10 a month.

It’s also worth bearing in mind that, as morbid as it may seem, most life insurance policies provide cover for terminal illnesses when you have less than 12 months to live. They usually also cover suicide after an initial exclusion period of 12 or 24 months. Always check the fine print of any policy.

What other types of life insurance policies are there?

Depending on your needs and those of your loved ones, you could also consider other types of life insurance such as:

  • Mortgage life insurance: This is a decreasing term policy that is specifically linked to your mortgage
  • Life insurance over 50: Policies for people typically between the ages of 50 and 80, but essentially another name for whole life coverage
  • Critical illness: Pays a regular income if an accident or illness prevents you from working in the long term. It can be incorporated into life insurance policies for a cost.

Should I take out an individual or joint policy?

If you are convinced that life insurance is for you, you will need to determine whether a single or joint life insurance policy is the most appropriate.

Single life insurance is exactly what it says on the box, covering only one person.

Joint life insurance is for couples. Most insurers require policyholders to be married or in a civil partnership, but others simply require that you live in the same household.

You will only have to pay a single bounty for both of you, with a single payment for whoever dies first.

A joint policy will generally be cheaper than two single policies, but although you have to pay two premiums, you will potentially receive two installments.

What if I can’t pay my premiums?

If you stop paying your monthly premiums, your life coverage will simply expire.

However, many life insurance policies offer “waiver of premium”. This means that if an accident or illness renders you unable to work, your life insurance premiums will automatically be covered for a certain period.

What if I don’t have life insurance?

Without life insurance in place, anyone you leave behind could find themselves with crippling financial worries at what will already be a trying time. And it could be comforting that the vast majority of life insurance claims are paid. Aviva paid 99.3% of life insurance claims in 2020, for example, while Vitality paid 99.6%.

However, you are unlikely to need life insurance in the following scenarios.

  • you have no dependents
  • you already have adequate coverage, for example through your job
  • your partner can afford to take care of your family if you weren’t there
  • you have another financial safety net in place, such as adequate savings or an investment property that can be sold
  • you are entitled to state benefits because you have a low income.

How to compare life insurance contracts?

To find the best life insurance for your situation, enter some information into our life insurance comparison tool. You can get quotes in seconds.

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