No one wants to think about passing away but taking out an appropriate life insurance policy can provide loved ones with financial security should the worst happen. However, it’s important to make sure you choose a policy that’s right for you and your circumstances.
Life insurance is a type of policy that pays out a lump sum on your death. If you have children, a partner or other loved ones that depend on your income for financial security, life insurance should be considered as part of your wider financial plan. It can ensure your loved ones are provided for should you pass away. It’s a step that can ease some financial worries at what would be an incredibly difficult time for your family. Taking out life insurance can provide peace of mind that they’ll be taken care of should something happen too.
There are two main types of life insurance to consider:
Term life insurance policy runs for a fixed period of time, such as five or 25 years
A whole life policy will pay out no matter when you die
With both options you’ll pay regular premiums for a policy, defaulting on these could invalidate your policy.
It’s important to note that a life insurance policy will only payout in the event of death. If you become critically ill or disabled, for example, it typically won’t pay out, though some may payout following a terminal diagnosis. If this is a concern for you, it may also be worth looking at critical illness cover and an income protection policy.
So, before you take out a life insurance policy what areas should you consider?
1. Do you have any existing policies in place?
Don’t start looking at new policies until you’ve reviewed those that you already have, this includes other types of financial protection too. It’ll build up a picture of the safety net you already have in place and highlight where there may be gaps. Think about what your priorities are and why you’re considering life insurance now.
Even if you’re not planning to take out a new policy, it’s advisable to regularly review those you already have. Circumstances and goals can change significantly, meaning that a policy may no longer be right for you.
2. Does your employer offer life insurance as part of your benefits?
As part of their benefits package, many employers offer life insurance or death in service cover, which would pay out a tax-free lump sum to beneficiaries if you died whilst working with the company. It’s worth reviewing what benefits you receive in order to take out a policy that complements existing cover.
You may find that employer-provided life insurance is enough for your needs, meaning you don’t need to look at taking out a personal policy unless you change jobs. However, in many cases, employees find that, whilst useful, a death in service payment wouldn’t go as far as they’d like. As a result, they can take out a policy that dovetails this to provide comprehensive cover whilst reducing costs.
3. How long would you like the term to last?
This should focus on your priorities and why you’ve decided to take out life insurance.
For example, if you’re worried about how a partner would pay the mortgage without your income, you can choose to align the term with the end of your mortgage. If your priority is children, you may want the term to continue until they reach adulthood. Both of these would require a term policy which has an end date.
You may also want to consider a whole life policy, which doesn’t have a fixed end. These can be useful if you want to ensure you leave a lump sum behind for your family no matter what their circumstances are. A whole life insurance policy, for instance, can be used to pay for an Inheritance Tax bill if it’s written in trust. If you have concerns about Inheritance Tax, please get in touch, there are often steps you can take to reduce the bill.
Think about what your aspirations are and how life insurance could ensure these are still met even if you pass away.
4. How much cover would your loved ones need?
Again, this will link to your priorities. Do you want to ensure the mortgage would be paid off and that children could be supported through university? Or do you want to provide a lump sum that could be used as income in the short or medium-term for loved ones as they deal with loss?
Take a look at what outgoings and liabilities your loved ones could be left with if they couldn’t rely on your income. This can start to build up a picture of how much cover they would need, to provide you with peace of mind. The higher the level of cover, the greater the policy premiums will be.
5. What will your premiums be?
People often find that life insurance policies are cheaper than expected. However, the premiums will be based on a range of different factors, including your health and lifestyle. If you don’t continue to meet premiums, your policy will no longer be valid and won’t payout. As a result, it’s important to understand what the ongoing costs will be, ensure they’re affordable and make them part of your budget.
Life insurance is part of managing risk within your wider financial plan. It can be a difficult topic to cover but can also provide security for those most important in your life. If you’d like to discuss what provisions you can make to ensure a secure financial future for loved ones, including taking out an appropriate life insurance policy, please contact us.
The contents of this article represents the opinion of Ruby Red Financial Planning Limited only. This article is for information only and does not represent advice or recommendation. Please seek independent financial advice before taking any action.