The main benefits of life insurance

The precise benefits of a life insurance policy will depend on your circumstances, but the main benefits of life insurance are:

  • Financial support for your loved ones when you're gone
  • Peace of mind for you knowing that your family will be taken care of
  • Giving your family time to grieve rather than thinking about money worries
  • A payout can be used to pay debts
  • It can cover lost earnings if you die when you're still working

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Why you could need a life insurance policy

There are many reasons why you might consider taking out life insurance cover. Your financial and family circumstances will all influence your decision, including the amount of life cover you might need. Here are just a few of the reasons why you might want to consider the benefits of life insurance.

You want peace of mind

Sometimes, the main benefit of life cover is knowing that your family will have a financial safety net when you're gone. That could give your spouse financial protection and time to look after your children without having to rush back to work.

You have a mortgage to pay

You can choose a life insurance policy that's designed to pay off your mortgage when you die, allowing your loved ones to stay in the family home. This will give you greater peace of mind knowing that they won't have to face the upheaval of a house move when they've just lost a loved one.

You have other financial commitments

Our financial commitments can vary from day-to-day expenses to loans. Life insurance can give you a single payout which your family can invest to cover the household bills in the years to come. They could also use the money to pay off an outstanding loan. Alternatively, you can choose a policy that pays a regular monthly income.

You want to maintain your family's quality of life

Our quality of life goes beyond being able to pay the bills. If you've worked hard to give your loved ones a good standard of living, life insurance can help you to continue that when you're gone. The payout could allow your children to carry on with their favourite activities or pay for the family holiday.

You don't have any savings

The average person in the UK only has £7,509 in savings, with 1 in 5 of us having no savings at all. If you do have a reasonable amount in savings, you might think that you don't need to take out life insurance. However, think about how much you have and how long that will last if your family needs to use it to replace your income.

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Are there different types of life insurance policies?

There are a range of types of life insurance offering different levels of coverage over different time periods. The main types of life policy are term life insurance and whole life insurance, however there are also other specialist policies designed for couples and the over 50s. Critical illness cover and terminal illness cover can also pay a lump sum when you're still alive but have been diagnosed with a serious illness. Here's our guide to the different types of life cover.

Term life insurance

As the name suggests, term life insurance policies provide life insurance for a specified period of time. You might choose a term life policy if you have a significant debt with a fixed term, such as a mortgage, and want to ensure it's paid off if you die before the end of the term.

If your employer offers group life insurance with death-in-service benefits, they'll usually also choose a term life policy that provides coverage until you retire.

There are different types of coverage available with term life insurance. The type you choose will affect the cost of your premiums and the amount the policy pays out on death.

Decreasing term life cover

When you opt for decreasing term life insurance, the amount the policy pays out decreases over time. This makes it an ideal choice if you have outstanding debts, such as a repayment mortgage, that will reduce over time as you keep making payments.

Level-term life insurance

Level-term life insurance pays out a fixed amount, regardless of the date of your death. The premiums are more expensive than decreasing-term life insurance because the sum assured remains constant throughout the life of the policy. You may also find that the buying power of the payment also decreases over time.

Increasing term life cover

Increasing term life policies are index-linked so the amount they pay out increases over the years. This type of policy keeps pace with inflation so the money will have the same buying power in 20 years as it would today. This type of policy is ideal if you have costs that are likely to increase over time. You might have a young family and want to ensure that your life insurance can pay for their school fees, university education or towards a deposit on their first home if you aren't around to contribute in person.

Increasing life cover is the most expensive option but most insurance companies will give you an annual renewal quote with the option to decline the increased premium if you need to.

Whole life insurance

A whole-life policy will pay out whenever you die as long as you keep paying the premiums. You'll need to pay premiums for your whole life, and it's significantly more expensive than other types of life cover, but it has its benefits.

You'll have peace of mind knowing that your family will be taken care of. You may be able to borrow back some of the premiums you've already paid in if you need to, although you'll typically pay interest on any sums you withdraw.

Young people opting for a whole-life policy will generally pay lower premiums but may find that they pay more in premiums than the policy ultimately pays out. It's crucial to look at how much life insurance you need and what your total payments are likely to be.

Joint life cover

A joint life insurance policy allows a married or cohabiting couple to take out one life insurance policy that covers both of them. This type of policy has the advantage of being cheaper than two single policies.

Whether this type of policy is right for you will depend on your individual circumstances. A joint policy will only pay out once. If you take the payout when the first partner dies the surviving policyholder will be left without cover. This may not be ideal if you have children and want to leave something for them when the second partner dies.

The level of cover also has to be the same for both partners, so it's important to consider whether this reflects your domestic and financial situation.

Over 50s life cover

Over-50s life insurance is a type of whole-life policy that has lower premiums because it's taken out later in life. This type of cover is typically advertised as a way to help with funeral costs, although it can also be used to pay off any other debts.

Critical illness cover

You can opt to include a provision in your life insurance that pays out some of the money if you're diagnosed with a terminal or critical illness, or if your child is diagnosed with a serious illness. You can also opt to buy critical illness insurance separately.

Critical illness policies only pay out if you're diagnosed with one of a list of serious illnesses. It pays you a lump sum which could give you a financial safety net allowing you to take time off work to recover or to care for your child.

Terminal illness cover allows you to claim if your illness has a short, life-limiting diagnosis.

Elderly couple making food for their children and grandchildren

How much life insurance do you need?

The amount of life insurance you need will depend on your individual circumstances.

Life insurance companies look at the following personal factors when providing you with a quote:

  • Age
  • Health and medical history
  • Your job
  • Lifestyle, e.g. any dangerous hobbies
  • Whether you smoke
  • Family medical history

The type of policy you choose, the policy term and the amount that you need your life insurance to pay out will also influence the cost of your premiums.

Calculating how much cover you need

The bigger the payout, the higher your monthly premium will be. To calculate the level of cover you need, start with your larger debts, for example, your mortgage and how much life insurance you would need to pay it off over time. You may already have a policy that covers this along with your mortgage, so it's important to check. A decreasing term life insurance policy can track your mortgage and pay off the full amount.

Next, consider any other outstanding debts that will need to be paid and which aren't already covered by payment protection insurance. These could include car loans or credit card debt.

Finally, think about the day to day expenses that your family will need to pay in your absence. Your life insurance may need to replace your annual income so think about the bills and other financial obligations that will continue when you're gone. If your spouse or partner is a stay at home parent, consider what extra help you might need if they're no longer around and what that will cost.

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What are the tax implications of taking out a life insurance policy?

When you buy life insurance you'll be helping to secure your family's financial future, but it can bring you some tax benefits too. Your dependents won't have to pay income tax or capital gains tax on the payment they receive.

However, if you have a lot of assets you'll need to look at your inheritance tax planning as this could be payable if your life cover payment takes your estate over the inheritance tax threshold.

Inheritance tax allowances

You can leave money and other assets to your loved ones tax-free as long as the total value of your estate is £325,000 or less. If you're leaving the family home to your spouse or children the residence nil rate band increases the total allowance to £500,000. Anything above that value is taxed at 40%.

Inheritance tax planning

There are ways to reduce the amount of tax you pay if the potential payout on your life insurance could take you over the inheritance tax threshold. One way is to put your insurance payout into a trust as this means it won't be treated as part of your estate. Your life insurance broker or insurance company should be able to advise you how to do this, but it's important to get financial advice to ensure it's right for your circumstances.

One of the key benefits of doing this is that the funds can be paid to your family much more quickly. This could be a real help if you wanted your life insurance to help with funeral expenses.

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Finding the right professional advice

We can help you to consider your life insurance options and choose insurance that fits your budget and provides financial protection for your family. Contact us for a comparison quote, and we'll help you to find the right life insurance cover for your circumstances.

We hope that this guide will help you to learn more about the potential benefits of buying life insurance.

Nicholas Zainal
Senior Broker

Nicholas Zainal

Nick has a wealth of knowledge and experience, having worked in the market for over a decade. He's a diligent broker who can advise on health insurance, life insurance, critical illness cover and business protection.

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