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Taking out family life insurance can be daunting for many people, as it’s an insurance often against the unthinkable. Sadly, the unthinkable can happen and it’s important to know that with life insurance, your loved ones will be looked after with a financial safety net to ensure that:
Mortgage/rent costs, bills, childcare, debts etc. could all be paid for.
The quality of life that they're used to can be maintained (or even enhanced).
Unnecessary stress and worry is avoided at a difficult time.
As with many insurance products, there’s lots of terms that risk sounding like jargon. So at Cavendish Online, we’ve put together a brief guide to explain what family life insurance is, to help you make a more informed decision on whether it’s right for you.
Family life insurance is a broad term, but as insurance products go, it generally refers to either ‘family income benefit’ or ‘term’ life insurance.
If you have dependents - such as children who are still at school, or a partner who relies on your income, life insurance can provide for them if you die. Such a loss can have a massive impact on your remaining family and their quality of life, so the last thing you’d want is to leave them with a financial burden.
With that in mind, if you’re a parent and you or your partner who’s a dependent (who isn’t a financial contributor to the household) were to pass away, you may want to consider if just one of you could realistically maintain the same working schedule after the loss of your partner - with considerations to the cost of childcare, maintaining the household and other daily family commitments. That’s why it’s important to always consider covering both partners with life insurance policies, either individually or both on a joint policy.
‘Family income benefit' provides a regular tax-free income to your family in the event of your death. Essentially, it acts to replace your income to protect the finances of your loved ones if you were to die within the period of the policy. Unlike ‘term’ insurance (which pays out a lump sum), family income benefit pays out incrementally, as if you were earning a monthly wage for a set amount of time.
If you’re interested in taking out a family income benefit policy, we’ll need to know how much income you’d like your family to receive (and for how long) so we can calculate the cost of the cover.
‘Term’ life insurance comes in two types and can be taken out either as an ‘individual’ or on a ‘joint’ policy:
Level term life insurance pays out an agreed sum if you die during the policy’s lifecycle. If you outlive the term, you can simply set up a new policy based on your new circumstances.
This type of cover offers your family protection by covering flat costs, such as the loss of your income.
Example of level term life insurance
Insurance for the value of £150,000 is taken out
The term is fixed for 20 years
If you die during the 20 years and make a valid claim, the payout of £150,000 is made
If you die after the 20 years, your insurance will have ended and there will be no payment.
Decreasing term life insurance pays out a sum which decreases over the lifecycle of the policy. Premiums on this type of policy are typically less expensive than they are on a level term policy. If your family would need to cover a mortgage or other debt which is paid off over time, this option could be the most cost effective and helpful way to do it.
Example of decreasing term life insurance
A policy is taken to cover the cost of a repayment mortgage at £250,000.
After monthly repayments, the total owed on the mortgage after the first year is £234,000.
The insurance on the policy decreases roughly in line with the mortgage and so has also reduced.
If you were to die during the policy length, depending on how long you have had the policy - a final settlement figure would be paid.
The final settlement figure would reflect that the amount of insurance had decreased over time.
Many couples also may wish to consider joint life insurance, which is usually both better value and simpler to manage. Joint life insurance covers two people, but it only pays out once. Most of the time, this payment will be a lump sum that goes to the survivor after the first person dies (within the term of the policy). When the policy ends, so does the life cover for the survivor.
TIP: The survivor on a joint policy is often still eligible for re-applying for life insurance after the death of their partner.
With two individual policies, your family will receive a payout following the death of each policyholder, so could benefit twice, however your premiums are likely to be more expensive as you’re each paying for a policy.
There’s no right or wrong type of cover for your family. Cover should be chosen based on understanding the options available and making an informed choice for your family and circumstances, both now and how they may likely be in the future.
The payout from a life insurance policy could help to cover some or all of your financial obligations if you were to suddenly die. For example, a two-parent family with 2 children might have a combined annual income of £35,000 and monthly outgoings of £2,000.
If one parent took out a policy and passed away, their family could receive a payout up to an agreed limit that could cover the household finances over a period of time.
The amount you want to secure and the premiums you’re willing to pay are up to you (and can be surprisingly affordable) making life insurance accessible to virtually all families.
The amount of Insurance to take out depends entirely on what costs your family would still need to pay if you or your partner were no longer around (and for how long). It’s important to consider expenses like:
Mortgage payments/Rent
Property maintenance
Utility bills
Childcare and school fees
Travel costs
Food and general living budget.
The family members who you choose to benefit from your life insurance policy can use the payout however they like. Typically, it’s usually spent on things like:
Repayments on a mortgage, or even clearing any outstanding mortgage
Replacing your wages, for day-today living costs
Children’s school or university fees
Costs for a funeral - in line with your wishes.
Taking out life insurance for your family gives them the freedom to continue to thrive in life, whatever they may need.
You may already have a life insurance policy in place but haven’t looked at it for some time. It’s certainly worth having a review to see if it still fits your needs and speaking with us to see if we could also save you some money.
Our team of expert protection consultants are here to help. Call for a quick quote and more information now:
01392 241 850(Monday to Friday, 10am to 6.30pm)
