If you have loved ones who are dependent on you, life assurance can make sure they’re taken care of financially if you die. So whether you’re looking to provide a financial safety net for your loved ones, moving house or a first-time buyer looking to arrange your mortgage life insurance – or simply wanting to add some cover to what you’ve already god – you’ll want to make sure you choose the right type of cover. That’s why obtaining the right advice and knowing which products to choose – including the most suitable sum assured, premium, terms and payment provisions – is essential.
Sufficient life assurance
Life assurance helps your dependants to cope financially in the event of your premature death. When you take out life assurance, you set the amount you want the policy to pay out should you die – this is called the ‘sum assured’. Even if you consider that currently you have sufficient life assurance, you’ll probably need more later on if your circumstances change. If you don’t update your policy as key events happen throughout your life, you may risk being seriously under-insured.
Own personal circumstances
As you reach different stages in your life, the need for protection will inevitably change. How much life assurance you need really depends on your circumstances, for example, whether you’ve got a mortgage, if you’re single or have children. Before you compare life assurances, it’s worth bearing in mind that the amount of cover you need will very much depend on your own personal circumstances, such as the needs of your family and dependants. There is no one-size-fits-all solution, and the amount of cover – as well as how long it lasts for – will vary from person to person.
Here are some of the main events when you should consider reviewing your life assurance requirements:
•Buying your first home with a partner
•Getting married or entering into a registered civil partnership
•Starting a family
•Becoming a stay-at-home parent
•Having more children
•Moving to a bigger property
•Changing your job
•Relying on someone else to support you
•Personal guarantee for business loans
Individual lifestyle factors
Your life assurance premiums will vary according to a number of different factors, including the sum assured and the length of your policy (its ‘term’), plus individual lifestyle factors such as your age, occupation, gender, state of health and whether or not you smoke.
Household to household
If you have a spouse, partner or children, you should have sufficient protection to pay off your mortgage and any other liabilities. After that, you may need life assurance to replace at least some of your income. How much money a family needs will vary from household to household so, ultimately, it’s up to you to decide how much money you would like to leave your family that would enable them to maintain their current standard of living.
Two basic types
There are two basic types of life assurance, ‘term’ and ‘whole-of-life’ but within those categories there are different variations.
The cheapest, simplest form of life assurance is term assurance. It is straightforward protection, there is no investment element and it pays out a lump sum if you die within a specified period. There are several types of term assurance.
The other type of protection available is a whole-of-life assurance policy designed to provide you with cover throughout your entire lifetime. The policy only pays out once the policyholder dies, providing the policyholder’s dependants with a lump sum, usually tax-free. Depending on the individual policy, policyholders may have to continue contributing right up until they die, or they may be able to stop paying in once they reach a stated age, even though the cover continues until they die.
Although the proceeds from a life assurance policy are tax-free, they could form part of your estate and become liable to inheritance tax. The simple way to avoid inheritance tax on the proceeds is to place your policy into an appropriate trust, which enables any payout to be made directly to your dependants. Certain kinds of appropriate trust allow you to control what happens to your payout after death and this could speed up a payment. However, they cannot be used for life assurance policies that are assigned to (earmarked for) your mortgage lender.
Remove the burden
Generally speaking, the amount of life assurance you may need should provide a lump sum that is sufficient to remove the burden of any debts and, ideally, leave enough over to invest in order to provide an income to support your dependants for the required period of time.
The first consideration is to clarify what you want the life assurance to protect. If you simply want to cover your mortgage, then an amount equal to the outstanding mortgage debt can achieve that.
To prevent your family from being financially disadvantaged by your premature death and to provide enough financial support to maintain their current lifestyle, there are a few more variables you should consider:
•What are your family expenses and how would they change if you died?
•How much would the family expenditure increase on requirements such as childcare if you were to die?
•How much would your family income drop if you were to die?
•How much cover do you receive from your employer or company pension scheme and for how long?
•What existing policies do you have already and how far do they go to meeting your needs?
•How long would your existing savings last?
•What state benefits are there that could provide extra support to meet your family’s needs?
•How would the return of inflation to the economy affect the amount of your cover over time?