If the main wage earner dies, aside from the grief, there can be financial uncertainty. A life insurance policy removes financial worries.
There are many different types of life insurance. Some are designed to pay off the mortgage, which is usually the biggest household debt. Other policies provide a cash sum for the policyholder’s relatives, or can provide money to cover inheritance tax.
Level-term life insurance
Level-term life insurance pays out a set amount should you did within a specified time. The amount paid does not usually vary during the lifetime of the policy, the cost of which depends on the length of the policy and the amount insured.
All life insurance policies will pay out on death, but some will pay out if a terminal illness is diagnosed.
If buying a fixed-term policy, you need to calculate how long it needs to last. If you have children, then you may want your policy to last until they leave full time education and start earning an income.
If you are a member of a pension scheme where retirement income is transferable to your dependants if you die, then it may be appropriate for the life insurance term to end when you retire.
It is advisable to arrange life insurance when you are young. Policies cost more as you get older.
Mortgage life insurance
Mortgage life insurance pays the remaining outstanding amount on the mortgage if you die. This means that over time, the amount paid out decreases as mortgage payments reduce the amount owed.
This is a cheaper option than full life insurance, but will not pay out a cash sum to your dependants.
Whole of life insurance
Whole of life insurance has no fixed period and pays out at death. Many whole of life insurance policies are linked to investments and will not pay out a fixed sum.
How much should you insure?
Ideally, a life insurance policy should cover about 10 times the income of the main earner of the family. That may seem high, but inflation will reduce this value over time.
If you cannot afford to insure 20 times the chief wage earner’s income, then you need to calculate the minimum amount your dependents will need. You need to consider the financial liabilities that your dependants will face. These include outstanding debts, funeral costs and mortgage payments. You may also want to make provisions for the future education of children if they go to university.
If your estate is liable to inheritance tax, then you may want your life insurance to cover the tax payments.
Life insurance benefits your dependants, making sure that they can cope with the financial impact of the policyholder’s death. If you do not have dependants, then there is no advantage in taking out life insurance.
Where to buy life insurance
For further help and advice and to purchase life insurance, contact Ascot Mortgages. We will find the best life insurance policy to suit your circumstances.