Life insurance can be a confusing part of your overall financial planning. Many people understand that having life insurance is vaguely important but are unsure when they should take out a policy.
Others believe that life insurance is a bit of a waste of money. There is a tendency to think that since it only lasts a certain amount of time or only pays out if you die and you’re not around, then there is no point in having it. In this article, we’re going to have a look at the basics of life insurance that will change your opinion.
By the end of it, you’ll have a good understanding that while there are some points in your life when life insurance is not necessarily needed, in general, life insurance is always a good idea. So, let’s start by having a look at what life insurance is and clarify what it isn’t.
What Is Life Insurance?
To put it simply, life insurance is a policy that pays out when you die. It may be used as a way to pay funeral costs, a mortgage, debts, or to make life easier for your family. In other words, you should consider taking out an insurance policy if someone will suffer financially if you are no longer around.
This may be your parents, who may have to pay your funeral costs; your spouse and children, who will have to cope with any debts and bills that you will no longer be paying; or anyone else you can think of who will be poorer if you have died.
Are There Different Types of Life Insurance?
There are but you’ll be glad to know that there are only a couple; whole-life insurance and fixed-term insurance. They are pretty self-explanatory but let’s go into a little more detail just in case.
Whole-life insurance lasts until you die, whenever that is, while fixed-term insurance only lasts a specific amount of time. The reasons there are two different types of life insurance is that they are taken out with different outcomes in mind.
Fixed-term insurance is normally used to cover a large debt that is paid for over a certain amount of time, such as a mortgage. A whole-life policy is taken out when someone wants it to pay out when they die.
Are There Any Other Types of Cover?
There are but they tend to be part of life insurance policies themselves. The two most common ones are critical illness cover and terminal illness cover. Now, it’s difficult to go into detail about these two types of cover because each company will have different policies and conditions, so you may need to do your own research on this.
Additionally, as you might expect, the amount you have to pay each month (your premiums) will depend on what sort of illnesses are covered and which, more importantly, are excluded. For example, prostate cancer may be excluded for men. Also, cancer may only be covered if it reaches a certain severity. These are all things you will need to research as well.
Do You Need Life Insurance?
There are many different schools of thought here and you need to decide what you think is right for you. Overall, most people concede that the earlier you get life insurance, the better. This is especially true if your policy can be changed in the future.
And just to clarify here, you don’t need to go crazy. You can start with only a few thousand pounds to cover your funeral costs if you want. You can always increase it later if your policy allows it.
There are three important times in your life (not including life cover in your fifties) when you need to consider cover.
- When you get your first mortgage (to protect your investment)
- When you get married (to cover your partner as well)
- When you have children (to ensure they are protected financially)
Do not make the mistake of under-insuring yourself and your partner, both for your children’s sake and for the people who might have to look after them. Grandparents and godparents may come to your children’s aid if anything was to happen to you, but their guardians may still struggle financially in taking on the responsibility.
By the way, you might be interested to know that, believe it or not, there is no law forcing you to have life insurance, even if you have a mortgage. So don’t rely on your lender forcing you to take out a policy; it’s a decision you must make yourself.
How Much Life Insurance Do You Need?
This can be complicated to work out, but it is worth putting the time and effort in to ensure you don’t under-insure yourself. If you are in a partnership and one or both of you work, then it is very easy to calculate how much you would lose if one or both of you died. So, if you make £25,000 a year and your partner makes £30,000 a year, you certainly know how much you would lose if either one or both of you were to die.
However, what else is there that you and your partner do in your daily lives for your children, which is technically free, but you would have to pay for if you got someone else to do it? This is where many people make mistakes in their life insurance calculations.
For example, if one of you is a full-time, stay-at-home parent, sit down and work out exactly what that parent does, and then work out how much you would have to pay per hour to find someone else to do that work. You will be amazed at how much it will cost.
Wrapping It All Up
As the title says, this is only a basic guide so make sure you do your own research. Remember that as you go through life, you collect more and more people who may depend on you. Don’t let them down by not having your financial affairs in order. If you think, after reading this, that you may need life insurance, you probably do.