Do I really need life insurance?
Life insurance can be a valuable safety net – providing your dependents with a financial cushion should you pass away. But do you really need life insurance right now, and if not, when might it be worthwhile?
What does life insurance cover?
Life insurance typically pays out a cash lump sum to the beneficiaries when the policyholder dies. That money can be used to pay off large costs such as a mortgage or be used to cover big upcoming expenses, for example, school or university fees.
Beneficiaries can be anyone the policyholder chooses but it’s usually family or other dependents.
Do I need life insurance?
It’s entirely up to you whether or not to buy life insurance. There’s no legal requirement to have cover, even if you want a mortgage.
That said, if you’re trying to secure a mortgage, lenders will often ask you to put a policy in place. In some cases, lenders will make it a condition of the loan and may not release any funds until they have proof of a policy. This is to ensure that in the event of your death, they can recoup the loan if necessary.
Should I buy life insurance?
There are good reasons to buy life insurance, but they won’t necessarily apply to you depending on your circumstances. For instance, you may find a larger benefit from life insurance if:
- You’re the main earner in your family
- Your dependents rely on your income to cover costs, including a mortgage, bills or other household and family expenses
- You want to secure your family’s financial situation should you pass away
- You want to pay for your own funeral costs without eating into family funds
What are the reasons not to buy life insurance?
You may find less benefit from life insurance if:
- You’re single with no dependents
- You have no major financial commitments
- No one relies on your income
What types of life insurance are there?
One of the benefits of life insurance is that there are different types so you can choose what fits your needs best. Of course, on the flip side, this can make choosing a policy tricky.
To clarify your options, we’ve put together a comprehensive guide to life insurance, but here’s a quick summary of what’s available:
Level term life insurance
Your policy will last for a fixed period of time (the term) for example, 25 years. The payout (sum assured) will remain the same for the whole term. So, whether you pass away one year or 24 years into the term, the value of the sum assured is the same.
The drawback is that level term policies don’t account for inflation. For instance, a sum assured of £300,000 might seem a lot but in ten or 15 years, it might not go as far.
Increasing term life insurance
The term is fixed but the sum assured increases over that period to counteract inflation. While this can safeguard the value of the payout, it can be an expensive policy.
Decreasing term life insurance
Policies have a fixed term, but the sum assured decreases over time. These plans are usually bought to specifically cover your outstanding mortgage. Because of this, decreasing term cover is also sometimes called mortgage life insurance.
Whole of life insurance
As the name suggests, these policies will cover you for the rest of your life. Your beneficiaries will receive a payout whenever you pass away (as long as you’ve kept up with premiums and subject to the policy’s terms).
Whole of life policies can also be expensive but some providers will cap payments. For example, you won’t need to pay premiums if you’ve made 30 years’ worth of contributions. Some policies may have an age limit instead, so once you hit 90 you won’t need to pay anymore – but you’ll still be covered. Not all whole of life policies operate like this so check contracts carefully.
Over 50s life insurance
These are specifically aimed at adults between 50 and 85 (although some providers will only take on policyholders up to age 80).
Payouts from over 50s plans tend to be smaller compared to other types of life insurance. In many cases the cash is used to cover funeral costs or is left as gifts to family members.
The main benefits of over 50s life insurance is that they guarantee acceptance, so it doesn’t matter if you have a history of poor health.
When should I get life insurance?
There’s no standard ‘right time’ to get life insurance. It fundamentally comes down to where you are in your own life.
However, as a general rule, life insurance becomes more expensive as you get older. This is simply because health risks increase with age. So, if you do find yourself married with children and a mortgage early on, it’s worth considering your options sooner rather than later.
How much does life insurance cost?
A range of factors affect what you pay, and insurers will consider:
- Your age – life insurance premiums typically increase as you get older.
- Your overall health – you’ll be asked about your height, weight and your general health.
- Medical history – some pre-existing health conditions can affect premiums, as can inherited conditions.
- Your lifestyle – drinking and smoking on a regular basis can increase what you pay.
- The level of cover you need – the bigger the sum assured, the more your policy will cost.
- The policy term – the longer the policy term, the greater the likelihood of a claim which will be reflected in your premium.
What life insurance do I need?
Firstly, consider whether life insurance is something you need now. If it is, think about the policy term and what you want the sum assured to cover (making sure it’s enough to pay for the expenses you have in mind).
Remember that life insurance only pays out on death (or in some cases, if you’ve been diagnosed with a terminal illness). If you outlive your policy, it will end, and no money will be paid out. There is also no cash alternative, and you won’t get back your premiums.
To help you weigh up all the pros and cons, we’ve put together a comprehensive guide to life insurance so you can work out if it’s right for you.