For many people, the pandemic has made us realise the importance of life insurance as a fundamental part of a solid financial plan. It is understandable that we would rather not think of the time when we are no longer there.
But, as we have seen in recent years, it is important to protect the things that matter in case the unexpected happens.
We insure our cars, homes and even mobile phones, so it goes without saying that we should also be insured for our full replacement value to ensure that our loved ones are financially cared for in the event of our premature death.
Life Insurance will help you to financially protect your family. It could pay out a cash sum if you die while covered by the policy. You choose the amount of life cover you need and how long you need it for and you can pay your premiums monthly or annually.
It provides a safety net for your family and loved ones if you die, helping them cope financially during an otherwise tough time, ultimately it offers reassurance that your family would be protected financially should the worst happen.
We never know what life has in store for us, so it is important to get the right life insurance. A good starting point is to ask yourself three questions:
- What do I need to protect?
- How much cover do I need?
- How long will I need cover for?
This sum must account for their living costs and any liabilities, such as a mortgage.
It may be the case that not everyone needs life insurance (also known as life cover and death cover). But if your spouse and children, partner or other relatives depend on your income to cover the mortgage or other living expenses, then the answer is ‘yes.’
Life insurance makes sure they’re taken care of financially if you die. So whether you’re looking to provide a financial safety net for your loved ones, moving house or a first time buyer looking to arrange your mortgage life insurance – or simply wanting to add some cover to what you’ve already got – you’ll want to make sure you choose the right type of cover.
That’s why obtaining the appropriate advice and knowing which products to choose – including the most suitable sum, assured, premium, terms and payment provisions – is essential.
The appropriate level of life insurance will enable your dependants to cope financially in the event of your premature death. When you take out life insurance, you set the amount you want the policy to pay out should you die – this is called the ‘sum assured’. Even if you consider currently you have sufficient life assurance, you’ll probably need more later on if your circumstances change. If you don’t update your policy as key events happen throughout your life, you may risk being seriously under-insured.
As you reach different stages in your life, the need for protection will inevitably change. How much life insurance you need really depends on your circumstances, for example whether you’ve got a mortgage, single or have children. Before you compare life insurance, it’s worth bearing in mind that the amount of cover you need will very much depend on your own personal circumstances; such as the needs of your family and dependants.
What do I need to protect?
- Who are your financial dependents: your husband or wife, registered civil partner, children, brother, sister, or parents?
- What type of financial support does your family have now?
- What type of financial support will your family need in the future?
- What type of costs will need to be covered like household bills, living expenses, mortgage payments, education costs, debts or loans, funeral costs?
- There is no one-size-fits-all solution, and the amount of cover – as well as how long it lasts for – will vary from person to person.
These are some events when you should consider reviewing your life insurance requirements:
- Buying your first home with a partner
- Covering loans
- Getting married or entering into a registered civil partnership
- Starting a family
- Becoming a stay-at-home parent
- Having more children
- Moving to a bigger property
- Salary increases
- Changing your job
- Reaching retirement
- Relying on someone else to support you
- Personal guarantee for business loans
Individual lifestyle factors determine the cost
The price you pay for a life insurance policy depends on a number of factors. These include the amount of money you want to cover, the length of the policy, but also your age, your health, your lifestyle, and whether you smoke.
Replacing at least some of your income
If you have a spouse, partner or children, you should have sufficient protection to pay off your mortgage and any other liabilities. After that, you may need life insurance to replace at least some of your income.
How much money a family needs will vary from household to household so, ultimately, it’s up to you to decide how much money you would like to leave your family that would enable them to maintain their current standard of living.
Two basic life insurance types
There are two basic types of life insurance, ‘term life’ and ‘whole-of-life’, but within those categories there are different variations.
The cheapest, simplest form of life insurance is term life insurance. It is straightforward protection, there is no investment element and it pays out a lump sum if you die within a specified period. There are several types of term insurance.
The other type of protection available is a whole-of-life insurance policy designed to provide you with cover throughout your entire lifetime. The policy only pays out once the policyholder dies, providing the policyholder’s dependants with a lump sum, usually tax-free. Depending on the individual policy, policyholders may have to continue contributing right up until they die, or they may be able to stop paying in once they reach a stated age, even though the cover continues until they die.
When choosing between these life insurance options, think about:
- Affordability – a joint life policy is usually more affordable than two separate single policies
- Cover needs – do you both have the same life insurance needs, or would separate policies with different levels of cover be more appropriate?
- Work benefits – if one of you has work ‘death in service’ benefit, you might only need one plan.
- Health – if your joint policy is with someone in poor health, this may increase your monthly payments.
Remove the burden of any debts
Generally speaking, the amount of life insurance you may need should provide a lump sum that is sufficient to remove the burden of any debts and, ideally, leave enough over to invest in order to provide an income to support your dependants for the required period of time.
The first consideration is to clarify what you want the life insurance to protect. If you simply want to cover your mortgage, then an amount equal to the outstanding mortgage debt can achieve that.
To prevent your family from being financially disadvantaged by your premature death and to provide enough financial support to maintain their current lifestyle, there are a few more variables you should consider:
- What are your family expenses and how would they change if you died?
- How much would the family expenditure increase on requirements such as childcare if you were to die?
- How much would your family income drop if you were to die?
- How much cover do you receive from your employer or company pension scheme and for how long?
- What existing policies do you have already and how far do they go to meet your needs?
- How long would your existing savings last?
- What state benefits are there that could provide extra support to meet your family’s needs?
- How would the return of inflation to the economy affect the amount of your cover over time?
To discuss your situation, click here to schedule a no obligation initial consultation with one of our financial advisors.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
The value of investments and income from them may go down. You may not get back the original amount invested
Lawsons Equity Limited is a company registered in Malta with company number C49564 and licenced by the Malta Financial Services Authority as Enrolled Insurance Brokers under the Insurance Intermediaries Act 2006, and to provide Investment Services under the Investment Services Act, 1994.
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