Over the last 50 years the percentage of adults with life insurance has dropped sharply to around 35%, even though payout rates are consistently over 95%. There are some interesting possible reasons why this might be the case….
- Increased mistrust of insurance companies
- Attitudinal change
- Advances in medical care resulting in increased life expectancy
So, does this mean you shouldn’t worry about it?
There are some people who REALLY should have life cover. For others the need is less acute. This article will help you work out where you fit in.
Do I need life insurance?
If you have financial responsibility for others
Post-separation, if you find yourself in a position of having sole, or disproportionate responsibility for your kids, then they are more financially dependent on you than ever. If you die whilst they are under 18, making sure your children’s guardians are financially equipped to provide for them is vitally important. You may already have sufficient means to enable this, but if not, life insurance can help achieve this outcome.
In the UK the average age that children leave home is 24. 12% still live with their parents until they are 34! 😬 Culture has shifted, expectations have changed and economic circumstances are different. We are potentially financially responsible for our children for far longer than parents were a generation ago and you may want to establish provision for older children through life insurance. Even if you have adult children who are not dependent you may, in your absence, wish to pay for ongoing education, help them onto the property ladder, to start a business or just to leave them some sort of financial legacy. Whatever your circumstances, if you have children, life insurance can help establish appropriate provision, giving you peace of mind.
You may have financial responsibility for people other than your children, in which case the same logic applies. Life insurance provides the peace of mind that you can meet your responsibilities and provide your loved ones the consolation that they at least won’t have to concern themselves with money.
If you have financial obligations
When a person passes away, the deceased’s estate, which includes all their assets and liabilities, is used to pay off any outstanding debts. The executor of the estate is responsible for settling these debts before any inheritance is distributed to beneficiaries. If your estate lacks sufficient funds to cover the debts, creditors may seek to recover the debt from family members. Liability isn’t automatic, yet there are exceptions. If a family member co-signed a loan or held joint accounts with the deceased, they could be held liable for the remaining debt. It is essential to understand these legal implications to ensure that family members are not unexpectedly burdened with debt after a loved one’s death. Appropriate life cover is one way to ensure this situation does not arise.
If you have fantastic death in service
Work-based cover, such as a death-in-service lump sum, can provide significant financial protection by paying a multiple of your salary to your beneficiaries if you die while employed, reducing the immediate need for separate life insurance. However, it’s essential to consider whether this coverage is sufficient to meet your family’s long-term financial needs, especially if you change jobs, retire, or have additional financial responsibilities that might not be covered under your employer’s scheme.
If you already have a sufficient estate
If your estate is substantial enough to cover your family’s financial needs after your death, the necessity for life insurance may be reduced. However, it’s crucial to consult a financial planner to evaluate your estate’s capacity through cash flow modelling to ensure there are no unexpected eventualities.
What are the different types of cover?
Term Assurance
Life insurance will typically pay out the sum assured in the event of death during the term of the policy. So, let’s say you’ve asked for cover of £500,000 for 20 years. As long as you keep paying the premiums up until the date of death and your death occurs within 20 years of the start of the policy, your beneficiaries would receive £500,000.
Range of options
You have a range of options for ‘term assurance’ policies, such as:
- The amount of cover can increase each year to match inflation (resulting in a small premium increase each year)
- The amount of cover can decrease each year so that the sum assured matches the amount outstanding on a repayment mortgage
- The premiums can start off low and then get higher over the term of the policy, running in parallel with earning capacity which tends to increase over the course of your career
- Premiums can be fixed throughout the term, known as ‘guaranteed premiums’
- ‘Flexible cover’ policies offer the opportunity to change the amount of cover (without medical underwriting) when your circumstances, change, e.g. you have a baby, change jobs or take on a bigger mortgage
Whole of Life Cover
Whole of Life Insurance is a type of life insurance policy which provides coverage for the insured’s entire lifetime, rather than for a fixed term. It guarantees a payout (known as the death benefit) to beneficiaries upon the policyholder’s death, provided premiums are continuously paid or until the policy becomes fully paid up.
Key Features of Whole of Life Cover:
- Lifetime Cover: Coverage lasts until the policyholder’s death, regardless of age
- Guaranteed Payout: A tax-free lump sum is paid to beneficiaries when the policyholder dies
- Premium Payments:
- Fixed Premiums: Often remain the same throughout the policyholder’s life
- Reviewable Premiums: May be reviewed periodically, potentially increasing over time
- Investment Element (where applicable): Some old whole of life policies had an investment component, where part of the premium was invested and therefore provided a ‘cash value’ if the whole of life policy should ever be cancelled
Family Income Benefit
If you have dependent children of any age, one of the most effective types of life insurance is Family Income Benefit. These policies pay an annual tax-free income from the date of death to the end date of the policy. You stipulate the end of the policy, which many people coincide with the children reaching a certain age. By paying out an annual amount, whoever is left behind to look after your kids would essentially be paid a salary to do so.
It is efficient and affordable because it’s a decreasing policy. Let’s say you have a Family Income Benefit which would pay £50,000 a year for 10 years, the total amount of cover if you died in year one is £500,000 (£50,000 x 10 years) but by year five, its only £250,000. This decreases the cost considerably compared to a term assurance.
There is no age limit, so you can also take out this policy for older ‘adult children’ and make them the direct beneficiary. It’s a really flexible tool to ensure your children are financially provided for whatever their age.
Critical Illness
As a single person you’re no longer shielded from the negative consequences of long-term injury or illness by a working partner. As an independent individual the risk is greater and the consequences more acute, especially if you support others with your income. Critical illness cover provides a lump sum payment upon the diagnosis of a serious illness such as cancer, heart attack, or stroke. A financial cushion to cover medical expenses, mortgage payments, and everyday living costs, allowing you to focus on recovery.
Critical illness policies can be taken out either as an add on to life Insurance or as an independent policy.
Pros and Cons Comparison:
| Independent Critical Illness Cover | Add-On to Life Insurance |
| Separate payout from life insurance | Single payout—either critical illness or death |
| If you survive your critical illness and later die, your family will have benefited from two lump sums | Ends after critical illness payout, so if you die later, your family wouldn’t receive any more money |
| Often a higher overall cost for two policies | Cheaper as a combined policy |
| The term can be longer or shorter than your life insurance | The term will be the same as your life insurance |
Everyone should take these 3 steps
1. Assess
Assess your financial responsibilities and obligations and consider desired levels of financial provision for beneficiaries
2. Calculate
Calculate the amount of cover in £ that you would therefore require in the event of your death
3. Review current financial situation
Check employer benefits and the value of your existing estate. Compare to the figure arrived at in step 2.
If there is a shortfall between amount of cover you wish to provide and current financial capacity to provide that amount then take these additional 3 steps:
Customise
Based on your specific circumstances identify which of the policies you need to plug the gap. Whole of Life, Term Assurance or Family Income Benefit etc
Select a provider and plan
Research the different features and benefits of the available plans in the market to identify the specific products which will deliver the type and level of coverage you require. Note that they vary widely in quality.
Review
Review your policy and ensure it evolves as your circumstances change. It is vital that your coverage remains aligned with your needs.
