The very foundation of insurance is the ability to protect both yourself and your family against the things in life that you can’t control – your health and, of course, your death. Arguably, the most important stone in this foundation is life insurance and yet it is regularly overlooked.
To talk about mortality is never a cheerful subject but one that must be broached and the sooner the better. Ask yourselves some tough but necessary questions: What would happen to my family if the worst were to happen? What would the future hold for them? What problems would they have? What would they have to give up? What effect would this have on them?
Who needs life insurance?
Life insurance is typically important for people with dependents and financial obligations such as mortgages and other debt or children’s education fees. It fills the financial gap that would occur if you were to die by providing a lump sum or income so your family can continue the standard of living they have become used to. As with all kinds of insurance, the key question to ask is: “Would this event cause financial hardship for me or my dependents?”.
On the other hand, if you are a young professional with no dependents, or if you do have dependents but have sufficient liquid financial assets to provide for them after your death, life insurance may be unnecessary.
What can Life Insurance do for me?
1. Provide an Income Replacement for dependents
If people depend on your income, life insurance can replace that income for them if you die.
The most commonly recognised case of this is parents with young children. However, it can also apply to couples where the survivor would be financially stricken by the income lost through the death of a partner, and to dependent adults, such as parents, siblings or adult children who continue to rely on you financially.
When estimating income replacement needs, it is important to account for all kinds of income and obligations involved and how they may change in the event of death.
- It may be appropriate to insure a stay-at-home spouse who doesn’t have a financial income, but whose passing would generate a financial burden in the form of increased child- and home-care costs.
- Just as life insurance can pay off the remaining mortgage, so that your partner can live in the family home without financial stress, you may have other outstanding contracts and obligations that you would like to honour – to a business partnership or to a building contract, for example.
- Government- or employer-sponsored benefits of your surviving spouse or domestic partner may be reduced after your death, requiring additional income.
If you are an expat or looking to move abroad, you should also consider the public services of where you are moving. Free public healthcare and education may well not be of the same standard that you are accustomed to at home, and you might want to provide the necessary income for your dependents to use private alternatives.
2. Pay final expenses
Life insurance can pay your funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.
3. Create an inheritance for your heirs
Even if you have no other assets to pass to your heirs, you can create an inheritance by buying a life insurance policy and naming them as beneficiaries.
4. Pay Inheritance Tax
Life insurance benefits can pay estate taxes so that your heirs will not have to liquidate other assets or take a smaller inheritance. Many countries levy inheritance tax upon death. UK inheritance tax is currently 45%.
5. Make charitable contributions
By making a charity the beneficiary of your life insurance, you can make a much larger contribution than if you donated the cash equivalent of the policy’s premiums.
6. Create a source of savings
Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner’s request. Since most people make paying their life insurance policy premiums a high priority, buying a cash-value type policy can create a kind of “forced” savings plan. Furthermore, the interest credited is tax deferred (and often is tax exempt if the money is paid as a death claim).
What kind of Life Insurance is appropriate for me?
There is a range of life insurance products we can help you with:
- Whole of Life Insurance – this kind of insurance pays out to your beneficiary in the event of your death, whenever that may be. Benefits are paid on death or upon reaching an age specified in the policy, typically at the age of 100.
- Term of Life Insurance – this kind insures against your untimely death for a fixed number of years, for example, for the duration of your children’s education.
- Decreasing Term Insurance – this kind of insurance can be used to pay off a mortgage or other loan in the event of your death during the outstanding period of the liability. The death benefit decreases over the term to virtually nothing in the final year, in line with the outstanding loan.
Term Life vs Whole of Life
As mentioned above, Term of Life, or colloquially “Term Life”, insures you for a specific number of years, whereas Whole of Life insures you for your entire life. Of course, all of us must eventually pass away, and Whole of Life products account for this. Therefore they typically have higher premiums than Term Life policies, which insure you for specific periods and which are often taken out at a fairly young age – for example after marriage or having children. If your focus is finding cheap insurance, term life may be your best option, though bear in mind that if you do seek to renew your policy once the term has ended, premiums will have increased because of your age.
What about Ex Pat insurance?
If you are moving abroad, bear in mind that insurance is still a regulated and often bureaucratic industry, and often national rather than international in scope. So it may be best to shop around for Ex Pat insurance policies to cover your property, health and life insurance needs before moving. There are also Ex Pat insurance bundles which cover property and health issues which also include a life insurance policy, though often with fairly low levels of coverage.