There are many potential benefits of life insurance but it’s usually the reassurance it can provide that matters the most. This is because a payout from life cover can act as a financial safety net for your loved ones to fall back on should you die while your policy is in place.
How your beneficiaries spend the lump sum life insurance can provide is usually their choice. But the overriding benefit to all is that it can take away at least one worry from those you care about at a difficult time.
What are the main benefits of life insurance?
- Life insurance can be set up to cover a mortgage, potentially helping your family to stay in their home if you were to die.
- A payout could help your dependants replace any income shortfall felt by the loss of your earnings.
- Cover could be set up to pay off debts you might leave behind.
- A payout could be used to help cover the cost of your funeral.
- Life cover can help mitigate if you have little in the way of savings.
- Life insurance products can be used as part of inheritance tax planning in order to reduce or avoid this tax.
- Putting a policy in trust can provide greater control over assets and faster payouts.
- A policy could pay out early if you’re diagnosed with a terminal illness.
- You’re hopefully taking away some of the stress felt by those you leave behind.
- You have peace of mind that loved ones have a certain level of financial protection to fall back on.
Protect your mortgage
Taking out life insurance to cover your mortgage can provide peace of mind your mortgage will be paid off, and your loved ones can continue living where they’ve always lived, if you were to die. If you want to protect an interest-only mortgage, where the outstanding balance doesn’t reduce over the mortgage term, this will usually need to be covered using level term insurance. If you have a repayment mortgage, you could consider decreasing term life insurance, where the potential payout reduces in line with the balance left remaining on your mortgage, and can help keep premiums lower.
If you are planning to cover mortgage costs by using life insurance products, it’s important to regularly check that you have the correct amount of cover and that you make any necessary changes to your policy in line with changes to your mortgage situation.
If what you earn is used to pay any bills in your home, a life insurance payout could help cover any financial shortfalls felt by those left behind because your income is no longer there. The funds could help cover everyday bills or might allow your partner to work less hours if they’re needed at home more. There could also be a benefit to taking out life insurance if you’re paying school fees for your children or have other financial commitments that you want to make sure will always be paid.
Cover your debts
In a similar vein to covering a mortgage, you might have other debts that you want to make sure will be paid off if the worst happens to you. Outstanding debts are usually paid off using the value of an estate, so if a life insurance payout can cover what you owe, there should be more left to pass on as an inheritance.
Pay for your funeral
According to Sunlife, the average cost of a basic funeral in the UK in 2021 was just over £4,000. Add in other send-off costs and fees and the overall cost of dying more than doubles to almost £8,900. It’s a considerable sum of money, but one which you can give your loved ones the opportunity to cover using a life insurance payout. You should check with your provider on details of how and when payouts are made to ensure the funds can be accessed in time to pay for a funeral.
Mitigate for a lack of savings
Some people find it hard to save while others have money they’ve put aside but, out of necessity or temptation, might spend it when it should be left untouched. A benefit of taking out life insurance is that you can guarantee a lump sum of money will go to your beneficiaries if you die during the policy term, and with level term cover can specify what that amount should be.
Inheritance tax planning
By putting or writing a life insurance policy in trust, it is often possible to keep a life insurance payout separate from your estate, helping to protect your beneficiaries from inheritance tax. This might allow you to avoid inheritance tax altogether or could limit how much needs to be paid. Alternatively, if you know a significant inheritance tax bill is likely to arise, you might want to take out life cover so that a payout could be used to cover any such liability. It is best to seek professional financial advice if you are looking into using trusts or more generally looking to mitigate any inheritance tax liabilities as this can be a very complex topic.
» MORE: How does a life insurance trust work?
Faster payout and more control
Having life insurance in trust may also allow for faster life insurance payouts to your beneficiaries without the need to obtain probate. It may also give you more control over who receives the payout, and help reduce the chance that the funds could be used to pay off debts, as could happen if the policy was outside of a trust.
Some life insurance policies include a terminal illness benefit option at no extra cost, which could result in your policy paying out early if you’re diagnosed as terminally ill. It’ll usually be expected that you have less than 12 months to live for this to happen. An early payment can allow you the opportunity to get your affairs in order and to make the most of the time you have left.
Reduce the strain on loved ones
Losing someone you hold dear is hard enough to deal with in itself. If you can help alleviate any worries that those you leave behind might have about how they’ll cope financially moving forward, they can focus on the things that really should matter at the most difficult of times.
Peace of mind for you
Life insurance should provide you with peace of mind that your loved ones will have some level of financial safety net should the worst happen to you during the policy term. Having this reassurance is particularly important if you have a partner, family or anyone else that relies on you, and might struggle financially if you were to die.
Do you need life insurance?
The benefits of life insurance might seem compelling, but there may be situations where taking out life cover may not be worth your while.
These might include if you’re single and have no one that relies on you financially, or if you have a partner whose income would allow them and any other dependants such as children to continue to live comfortably, assuming they’re able to carry on working if you were to pass away.
Also consider any other protection you might have in place, including death in service benefits through your work, which may provide a sufficient payout that means life cover isn’t needed.
» MORE: Do I need life insurance?
What are the disadvantages of life insurance?
It’s important to consider the potential drawbacks of life insurance before you take out cover. Crucially, you should understand that there is usually no cash value attached to a life insurance policy unless you die during the term of the policy. If the term has ended, there will be no payout at all.
Also be aware that some policies can be costly, and having particular health conditions when you apply can increase the premiums you’re asked to pay. You will need to make sure that you can afford the premiums as you will need to commit to making these payments if you want your life cover to remain in place.
With some life insurance products there is also a risk of paying more in premiums than you get back as a payout on death.
How can I compare life insurance policies?
If you feel life insurance could be beneficial for you, our partnership with LifeSearch allows you to get a quote from a number of providers in double quick time.
There are different types of life insurance that aim to meet various protection needs, including level term, decreasing term and joint life cover. If you want protection against serious illness, you might also want a quote for life insurance combined with critical illness cover.
If you’re unsure what type of cover you might require, or how much, you can also discuss your individual circumstances with a LifeSearch adviser.
» COMPARE: Life insurance quotes
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