Life insurance: how much cover do you need?

Before making any final decisions, “also check what provision your employer makes for the event of your death”, said MoneyWeek. Many companies offer a death-in-service benefit “that will pay your family a lump sum between double and quadruple your annual salary” if you die while in their employment.

What are the types of life insurance? 

The vast majority of life insurance sold in the UK is term-life, which runs for a fixed period. The policy pays out if you die during the term, so, essentially, the insurer is betting on you staying alive so that it gets to keep your premiums.

By contrast, whole-life policies last until you die, so the bet is about when that happens. If you die at a younger than expected age, the insurer will have to pay out a guaranteed lump sum that is likely to be more than you paid in premiums. But if you live for a long time, the insurer keeps collecting your premiums.

If you opt for term-life insurance, you choose between level, decreasing and increasing term cover. Level term premiums “are usually fixed and the cover amount stays the same” regardless of when you die, said NerdWallet. The cover amount doesn’t adjust for inflation, so may be worth less over time. 

With decreasing term cover policies, the premiums are also fixed and are usually lower than those for level cover. But the cover amount drops over time, “in line with what you owe on a repayment mortgage or other long-term loan”, the personal finance site continued. “So the lump sum would be larger at the beginning of the policy than near the end.” 

Some insurers offer the option to protect the lump sum from the effects of inflation. The cover amount is linked to a measure such as the consumer prices index or retail prices index, to reflect rising costs. As your cover amounts increases, your premiums usually will too, usually up to a maximum amount. 

Other life insurance options include over 50s cover, which is a type of whole-life policy, and joint life, which covers two people under one policy, with the payout going to the surviving partner.

Whichever you choose, consider putting your life insurance policy in a trust. Otherwise, said MoneyWeek, “when you die the payout is classed as part of your estate, so could be liable for inheritance tax”.  

Taking out a life insurance policy is fairly straightforward. “You can compare policies on price comparison sites and take one out online, as you would for car insurance for example,” said Unbiased.

But, the website cautioned, it may be worth speaking to a financial adviser to make sure your preferred policy is “well suited to your needs and financial situation”. 

Marc Shoffman is an award-winning freelance journalist, specialising in business, property and personal finance. He has a master’s degree in financial journalism from City University and has previously written for FTAdviser, ThisIsMoney, The Mail on Sunday, and MoneyWeek. 

Article source: https://www.theweek.co.uk/business/personal-finance/959744/life-insurance-how-much-cover-do-you-need