Life insurance is designed to provide your loved ones with a cash lump sum should you die during the policy term of the life cover you’ve arranged. Many policies also come with features that can pay out early if you’re diagnosed with a terminal illness, and it’s expected you have less than a year to live.
Financial reassurance is the main benefit that life insurance offers but, as the policyholder, you’ll need to pay a monthly premium for the cover to remain valid. So do you really need life insurance, when might you consider setting life cover up, and is it worth taking out?
Why do I need life insurance?
Life insurance is mainly taken out for peace of mind that those you leave behind will have a certain level of financial support if you die.
Those who receive the payout, the beneficiaries, are free to use the money as they wish, but often life cover will be taken out to ensure a mortgage can be paid off, or to make sure loved ones have the means to continue paying the bills.
You might also consider getting life insurance to cover your funeral costs or a potential inheritance tax bill that might need to be paid on your estate. Policies can also be put into a life insurance trust, potentially making your assets exempt from inheritance tax.
» MORE: 10 benefits of life insurance
Who needs life insurance?
When trying to decide whether to take out a life insurance policy, it’s usually best to think about your financial contribution to your household and the impact that you not being there would have on your family.
In particular, taking out life insurance is often worth considering if:
- your income is relied upon to pay all or some of the mortgage or other bills in your household
- you have a partner, children or other dependants who could struggle financially if you weren’t around
Also consider whether any new expenses might arise if you were to pass away, such as childcare costs if your partner needed to work.
When should you take out life insurance?
While there is no definite answer as to when you should take out life insurance, the following events are often important times to consider your protection needs:
- When you’re buying a home and taking out a mortgage.
- If you’re in a relationship or get married, and your incomes are interdependent.
- Should you have children or become financially responsible for others who depend on you.
It might be worth considering that it tends to get more expensive to take out life insurance the older you get. But also keep in mind that it’s not usually possible to have a life insurance policy before the age of 18. There are also upper age limits to taking out a policy, which will depend on the type of life insurance, whether critical illness cover is included, and on each insurer.
Is life insurance worth it?
Whether life insurance is worth it will depend on your circumstances as a family and how you think they’re likely to change if you were no longer there. If any of the following apply to your situation, taking out life insurance could be worth considering:
- If you have a mortgage, life cover can be used to make sure it could be repaid if you died, providing reassurance that those left behind can remain in the family home.
- Should you work, the money from a life insurance payout might help your family fill the gap left by the loss of your income. Or if your role is to stay at home and look after the children, the funds could be used for childcare, or allow your partner to give up work and take on a caring role.
- If you have wider financial obligations, such as school fees, life insurance is worth considering to make sure these will be covered for as long as needed.
- If paying for a funeral – which can be expensive – would put a strain on your family finances, life insurance could be worthwhile taking out to help cover the costs.
At the same time, think about the assets you have in the way of savings and investments, and try to work out if they might be sufficient to support your loved ones financially if you die. When considering your assets you should think about the level of financial support these may provide as well as how quickly they can be accessed.
Also take into account any other form of life protection you might have, including death in service benefits through your work. If a payout from this would be high enough to provide your loved ones with a sufficient sum of money, it could influence how you feel about the benefits of life insurance and whether or not you want to take out additional cover. Of course, checking the terms and conditions of such policies is key, as is reassessing the protection you still have if you change jobs.
Pros and cons of taking out life insurance
There are many potential benefits of life insurance but some potential drawbacks to be aware of too.
Advantages of life insurance
- It provides peace of mind that loved ones will have financial support to fall back on.
- Your beneficiaries can use the money how they see fit.
- It could allow your family to remain in their home.
- It can be used to cover the cost of your funeral.
- It will be one less worry for loved ones at a difficult time.
- It can be useful as part of an inheritance tax planning process.
Disadvantages of life insurance
- There is usually no cash value unless you die during the policy term for pure protection policies.
- Some policies can be costly, and in some instances you could pay in more than you get back.
- You will likely need to pay more if you have certain health problems.
- There won’t be a payout if the policy term has ended.
Who doesn’t need life insurance?
There are certain circumstances when taking out life insurance might not be a priority for you. These might include if:
- you’re a single person with no financial dependants
- your partner’s income would be sufficient to live on, cover any new expenses and they could continue to work if you weren’t around
- you already have adequate protection in place, perhaps through job-related death in service benefits.
From a different perspective, you might also consider whether those in line to receive a life insurance payout would see their eligibility for certain means-tested state benefits affected.
Do I need life insurance for a mortgage?
There is no legal obligation to take out life insurance if you have a mortgage, although some lenders might only lend to you if you do. Having life insurance to cover a mortgage can help ensure your loved ones are able to continue living in the family home.
Life insurance policies taken out against a repayment mortgage are often set up on a decreasing term basis, where the amount of cover decreases in line with your outstanding mortgage. This can help keep premiums lower compared with level term assurance where the amount of cover remains the same throughout the policy term. Level term life insurance is often used to cover an interest-only mortgage.
Do I need life insurance if I’m single?
If you’re single, you might think you don’t need life insurance. However, there are a number of scenarios where getting life insurance if you’re single is worth considering. These include if you:
- have children that need protecting financially should you die
- bear financial responsibility for any other dependants, such as parents or other family members
- are buying a home with a mortgage and would like to pass it on to someone if you were to pass away
- have other debts that might need to be repaid
- want to cover the cost of your funeral
- want a way to leave some money to a certain organisation or charity
What happens if you don’t have life insurance?
This depends on your circumstances and of those who’ll be left behind.
The difficulty comes if you have no other form of protection in place and little in the way of assets to pass on to those who rely on you financially. The financial pressures on those left behind are usually even greater if you have children, an outstanding mortgage, or your income plays an important role in covering household bills. The ability of a partner to work and bring in the income could be affected and there will also be the cost of your funeral to consider.
Even if you think your family’s finances would be set fair without life insurance as a safety net, it’s important to remember things can change quickly and look differently in the future.
How can I compare life insurance policies?
If you definitely need life insurance, or are perhaps a little uncertain but would like to see how much it might cost, our partnership with LifeSearch means you can get a quote right here.
There are various types of life insurance policy designed to meet different protection needs, including level term life insurance, decreasing and joint life insurance. It’s possible to get quotes for life insurance combined with critical illness cover too. You can discuss your individual circumstances with a LifeSearch adviser if you’re unsure how much cover you may require.
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