Do I need life insurance?
Life insurance schemes promise a payout of a fixed lump sum when you die. Here we look at who might benefit from life insurance, as well as any points to take into consideration.
What is life insurance?
Life insurance pays a lump sum or monthly income when someone dies. Some people are put off standard whole life insurance as, usually, age and health management are factors in the price.
Even when you really need it – you’ve taken up extreme sports, or you’ve recently gotten into red meat and drinking 10 units of alcohol a day – many companies will actually penalise you for dicing with death.
Most policies have things they don’t cover. If you have a serious health problem when you take out the policy, your insurance might exclude any cause of death related to that illness.
In what can seem like a morbid joke, the younger you are and the less likely you’re to die from a medical condition, the cheaper your policy is likely to be.
What are the different types of life insurance?
When choosing between different life insurance policies, you’ll need to think about your particular circumstances. Take into consideration how long you’d like the protection to last for, how much money you want the policy to pay out in the event of claim, and how much you can afford to pay in premiums.
There are two main types of life cover: term insurance and whole-of-life assurance.
“Term” life insurance pays out only if the person dies during a fixed term, for example in the next 5 or 10 years. If you don’t die, then the policy simply lapses and you get nothing back.
“Whole-of-life” life insurance pays out whenever the person dies. Usually, the amount you pay into one of these is much higher than term life insurance.
Term insurance insures against something that might happen; whole-of-life assurance has that name because you are assured a pay-out at some point.
Do I need life insurance if I’ve got a pension but no children?
If you’re someone who no longer has school age children, no mortgage and a sufficient pension, you might want to consider whether you need life insurance at all.
It could be a sensible move to take your pension benefits into account when assessing how much life insurance you need. In certain circumstances, a large pension fund can mean that a life insurance policy isn’t necessary.
If you die before you retire, defined contribution and pension funds can be paid to those close to you as a lump sum free of inheritance and other taxes.
By contributing to a pension rather than an insurance policy you are building up a secure retirement fund at the same time as protecting those who depend on you.
Though, that might not be enough if you have a large mortgage to pay off, which would leave anyone relying on you with little left from the pension fund to live on.
How do I know when I need life insurance?
If you don’t have a large pension, you’re not eligible for benefits and you’ve got people who rely on you, then you might want to think about life insurance.
If you’re the sole earner in the family, without life insurance your family might not be able to fund the mortgage, rent, or other day-to-day expenses if you die.
The problem with ‘whole-of-life’ policies
A whole-of-life insurance policy provides cover for your entire lifetime. A lump sum is paid out at whatever age you die, as long as the premiums have been paid continuously from the start of the policy.
The premium you pay is split to purchase life cover and build up an investment reserve. The idea behind this is that the investment growth in the early years funds the higher cost of life insurance as people age.
Whole-of-life policies don’t get a particularly good wrap. You should bear in mind that if investments perform badly, the premiums might have to increase so that you maintain the same level of cover.
Paying for a funeral with life insurance payments
It’s possible that those close to you will get enough out of life insurance premiums to pay for your funeral.
Again, it’s worth noting that you often have to agree to make monthly payments for the rest of your life. If you live for a long time, you will pay much more into the plan than you will receive out of it, as the payout will be fixed. In this way, there may be cheaper arrangements you can put in place.
When will I die?
We’re not qualified to answer this question, sorry. Neither do we promote the use of tarot cards, Magic 8 balls or even the flipping of coins. Not our bag.
Find out more
The Money Advice Service is an independent body set up by the government. You can call it free on 0800 138 7777
You can also read the Citizens Advice page, Problems with an insurance claim
Complaints about whole of life policies should first go to the insurer. If the business doesn’t answer within eight weeks, or you’re unhappy with what it says, get in touch with the Financial Ombudsman Service
If you’d like to know more about life insurance, read our article on over 50’s life insurance