Planning for the future isn’t easy, which is why life insurance can be a vital safety net for you and your loved ones.
Despite best efforts to plan ahead, life is notoriously unpredictable, and one thing many people worry about is what would happen to their family when they’re gone.
Life insurance can offer you, and them, some peace of mind. There are lots of products to pick from, with different prices and varying levels of coverage.
Depending on which you pick, you could still pay off your mortgage, provide for your family or send your children to university even if you pass away earlier than expected.
Telegraph Money is here to explain what you need to think about and how much coverage you need. We will cover:
- Factors to consider when evaluating coverage needs
- Methods for calculating your required coverage
- How to review and adjust your life insurance over time
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FAQs
- What happens if my coverage needs to change?
- Can I have multiple life insurance policies?
- What’s the minimum amount of life insurance you need?
- If I’m not married, will my partner still get the money my policy pays out?
Factors to consider when evaluating coverage needs
According to the experts, it’s important to look across your life and examine what will need to be covered in the event of your death – and for whom.
There are two main types of life insurance cover: term life insurance and whole of life policies.
Term life insurance policies promise a payout if you pass away during an agreed timeframe.
Whole of life insurance policies provide a payout whenever you die as long as you have been keeping up with the premiums.
The best option for you will depend on your circumstances.
Many people take out life insurance to cover their mortgage, meaning their loved ones can continue to have somewhere to live, not having to face the stress and financial difficulty of struggling to meet mortgage payments or being forced to move house.
This can be a wise move when you have a young family and large mortgage debts, particularly as Child Bereavement UK says more than 46,000 dependent children lose a parent each year.
Justin Taurog, of insurance firm VitalityLife, said: “When considering what type of life insurance might be right for you, it’s best to think about what your circumstances are.
“For example, if something were to happen to you, would you have any debts, such as a mortgage, or if you were sick and unable to work, what financial security would be most useful for you to have?
“Financial advisers are also a great resource and will review your circumstances with you to find the product that meets your needs.”
Cost is another factor to think about.
Term policies tend to be cheaper than whole of life policies – but there are lots of other variables that can affect the price of your premium.
“Life insurance isn’t necessarily expensive, but the cost will depend on factors such as length of plan, age, health, and lifestyle.
“Ultimately, some cover is better than no cover, and plans can always be tailored towards a budget,” Mr Taurog added.
Others may look to cover anything from living and business expenses to funeral costs, future university costs for their children and more.
However, life insurance is still a consideration for people who aren’t married, mortgage holders or parents.
Victoria Francis, of Aviva, said: “Life insurance isn’t just for families with mortgages. You can also take out cover to help pay business expenses.
“Business protection could be used to help a business cover a loan, find funds to replace a key person or release money to purchase shares if a business owner dies.
“Even if you don’t have a family or a partner now, you may wish to consider buying a policy.
“Life insurance tends to be cheaper when you are younger and hopefully healthier. Policies are often flexible and can be adapted as your circumstances change in the future.”
While you won’t usually be around to see or use a life insurance payout, there are specific illnesses where the money is paid before you pass away to help cover important expenses.
“Most term life insurance policies also include a terminal illness benefit, which will pay out a lump sum if you are diagnosed with a terminal illness and you aren’t expected to live for more than 12 months,” explained Ms Francis.
“This would usually be paid before you die and this money could be used to get your affairs in order and allow you to not worry about your finances in your last months.”
Methods for calculating your required coverage
There are some rules of thumb for calculating how much life insurance coverage you will need.
Some people look for a product that pays out 10 times their annual salary as a lump sum. Others base it on the amount of their salary and the number of years their family would be financially dependent for.
These can give a helpful indication of how much you might need, but there is a danger of underestimating how much your family might need, potentially leaving them short.
The amount that’s actually needed and the type of products that fit best can vary significantly from person to person.
Paula Llewellyn, of Aviva, said: “This depends on your personal circumstances and how much money your dependents would need to maintain their lifestyle if you were no longer around.
“You should consider your income, debts, living expenses, and any future costs, such as education or childcare.
“If you want to specifically protect a mortgage, think about your mortgage amount. How much is still outstanding and how many years do you have left to pay?
“You can use a life insurance calculator to help you work out how much cover you need.” Many providers have these tools on their websites.
Some life insurance policies last for your entire life and pay out the same amount whenever you die.
Other cheaper products decrease in both duration and payout, as your family might be less in need if you die much later, such as in old age.
The key is to tailor your product, or products, to your circumstances and take financial advice if you need it.
How to review and adjust your life insurance over time
Life insurance tends to last much longer than other financial products, and it’s easy to forget about it.
However, it’s worth making some time once in a while to give your policy some attention.
Ms Llewellyn said: “To make sure you have the appropriate level of cover, you should revisit your life insurance when you hit key life milestones or if your circumstances change, such as your mortgage or the size of your family.
“For example, mortgage life insurance is usually set up in line with your original mortgage amount and can decrease as the mortgage does. So, any change to your mortgage or home could mean your family is faced with a shortfall when they make a claim.
“One top tip is to look out for Guaranteed Insurability Options.
“Put simply, this benefit gives you the flexibility to increase the payout amount of your policy without the need for any further medical information on certain life events, like the birth of a child, marriage, civil partnership or a house move.”
However, it’s not a good idea to review or change your policy too often.
Ms Francis said: “Life insurance isn’t like car or home insurance. It doesn’t tend to be renewable and is usually taken for a longer period of time, for example 25 years.
“The cost of cover is usually dependent on your age and health which means if you swap cover, you’re likely to see a price increase.
“Purchasing a new policy each year is unlikely to be a cost effective way to buy life insurance and as you get older, you may find that an insurer may decline to offer you cover.”
FAQs
What happens if my coverage needs to change?
If your circumstances have changed and your cover needs to be altered to reflect it, you should contact your provider.
It isn’t always necessary to buy a new policy because they may be able to amend your existing one. It’s usually wise to have your policy details and recent health information to hand in case you need them.
You should also shop around to see if purchasing a policy from a different provider meets your needs better. Cancelling an existing policy is usually quite straightforward, though you should always check the small print.
However, Ms Francis warned not to switch policies just for a cheaper price.
She said: “Life insurance isn’t always about getting the cheapest price. It should be about getting the best price for the specific cover and type of policy that meets your needs.
“A financial adviser can help you with this and recommend or advise you on the best course of action. They often have access to more comprehensive cover that can be tailored to your needs. They’ll also be able to compare any existing cover against any newer products available which may include enhanced features or added benefits.
“If you feel confident or you have simple requirements you may wish to go directly to an insurer or via a price comparison website.”
It’s important to make it a priority once you become concerned about your level of cover. By virtue of the situation, you don’t want to wait until it’s too late.
Can I have multiple life insurance policies?
There’s no limit to the amount of life insurance policies you can have.
One policy might not cover your needs fully, so you’re free to shop around and select the policy, or policies, you’d like.
For example, lots of people get “death in service” cover provided by their employer. This often comes as part of a benefits package with a job.
It usually pays out a set amount to your nominated beneficiaries if you die, and tends to be two to four times your annual salary as a lump sum.
However, this might not cover the amount you need to leave behind, so many people opt for additional life insurance.
You may also want your policies to do different things, or provide different amounts, which means you need more than one.
You’re not tied to one provider either – if you buy life insurance from one, you’re free to purchase more from somewhere else.
However, some insurers do have maximum benefit limits. This may mean they’ll ask if you have life insurance policies elsewhere.
Ms Francis added: “All insurance providers are required by the financial services regulator to provide products that offer fair value to their customers.
“They are required to complete a fair value assessment each year and act on anything that indicates that the product isn’t meeting the reasonable expectations of customers.
“This means that products that don’t pay out shouldn’t exist, so you should be confident that regardless of who you buy cover from your loved ones will be protected in the future.”
What’s the minimum amount of life insurance you need?
The amount will vary significantly depending entirely on your circumstances.
The situation can of course change over time, too.
Most experts agree that looking at what you would want to cover, who will rely on the money when you’re gone and how long they will need it are the key factors.
If you’re unsure, a financial advisor can help you make a decision. It’s also wise to review this over time, such as when your circumstances change.
If I’m not married, will my partner still get the money my policy pays out?
“Lots of people think that their partner will automatically get the money from a life insurance policy,” said Ms Francis.
“If you and your partner are not married and you haven’t made a will or set up a trust, the money will likely be paid to your family instead under the rules of intestacy.
“It’s important that customers should take the time to make arrangements to ensure the right people get the money from a life insurance claim.”
Ms Llewellyn added: “Writing life insurance in trust can be one of the best ways to protect your family’s future.
“Not only does it ensure that the money your cover provides goes to the intended recipients, but it can also give loved ones faster access to funds and inheritance tax is reduced as the money paid out from your policy is not considered part of your estate.
“It’s important to safeguard your estate so that your family are protected if the worst happens, especially if there is no will in place.
“Complacency or lack of awareness can be expensive, and there’s no guarantee your estate will go to your loved ones. Putting your life insurance policy into a trust reduces this risk.”
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