As you plan for the future, two financial products are bound to come into focus: pensions and life insurance. Both can serve as pillars of your financial security, yet they function quite differently.
If you have a pension, you may be wondering, "Do I really need life insurance if I already have a pension?" The answer isn't a simple yes or no, as it largely depends on your personal circumstances. In this article, we'll help answer this question and explain the differences between the two.
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What's the difference between pensions and life insurance?
Both life insurance and pensions share the goal of providing financial security, but they achieve this in different ways and serve distinct purposes. Let's break it down...
Life insurance
Life insurance is an agreement between you and an insurer. If you die whilst covered by the policy,, the insurer pays a lump sum to your designated beneficiaries (pending a successful claim). In exchange, you pay a monthly premium for cover.
The payout can help cover immediate expenses such as funeral costs, pay off debts, or provide your family with ongoing financial support.
How the policy pays out depends on the type of life insurance policy you have. Some policies last indefinitely, and others have expiration dates.
Pensions
A pension is a retirement savings plan that provides you with a regular income after you retire. It is typically funded throughout your working life through employer contributions, personal contributions, or both, often with tax relief from the government.
Unlike life insurance, which is designed to provide financial support to your dependants if you pass away, a pension ensures you have sufficient income to maintain your lifestyle in retirement.
While both financial products offer security, they serve different purposes: life insurance protects your loved ones, whereas a pension helps secure your own financial future in retirement.
What happens to your pension when you die?
How the pension is affected after your death can depend on the type of pension you have and whether you have nominated beneficiaries.
If you have a workplace or private pension (defined contribution), the money can usually be passed to your beneficiaries. If you die before age 75, they can often inherit it tax-free as a lump sum or regular income. If you die after age 75, any withdrawals they make will be taxed at their income tax rate.
For final salary (defined benefit) pensions, some schemes provide a reduced pension fund to a spouse, partner, or dependent, but the amount and eligibility depend on the scheme’s rules.
A State Pension does not get passed on when you die. In some cases, a spouse or civil partner may inherit additional payments or qualify for bereavement benefits based on your contributions to National Insurance.
Should I take out life insurance alongside my pension plan?
Even if you have a sizeable pension, it could still make sense to have life insurance cover. In some cases, the money from your pension may not be enough to keep your family afloat in your absence. Or, your partner or spouse may not be entitled to a significant portion of your pension benefits, particularly if you're relying on a state pension.
Another example could be if you die after you've retired. In this case, you may not have as much pension left to provide for your loved ones, especially if you have already withdrawn a large portion of it for your living expenses.
Pensions aren’t always guaranteed, as they can be affected by market fluctuations and changes in pension schemes. Both may impact the benefits available to your beneficiaries.
Life insurance, on the other hand, is customisable, allowing you to select a cover amount and policy term that aligns with your needs. It can serve as an additional safety net, so your family has financial protection, helping to cover ongoing expenses, debts, or costs for your children.
By having both, you can provide greater protection to your family should the worst happen.
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What are the main types of life insurance?
There are two main types of life insurance policies:
Whole life insurance (life assurance) - which covers you for the remainder of your life. As long as you continue to pay your premiums, your family will receive a fixed lump sum when you die.
Term life insurance - which covers you for a set period of time, typically between 5-50 years. The policy will pay out if you die within the term. If you survive the term, the policy expires, no payout is made, and you will need to take out a new policy if needed.
There are specific types of term cover:
Level – where the payout value and premium remain fixed throughout the policy term.
Increasing – where the payout value increases over time to protect the value from inflation. The premiums can also increase.
Decreasing – where the policy is used to protect debts, such as a repayment mortgage. The payout decreases over time as repayments are made.
Please note: The insurance products offered by Cavendish Online have no cash-in value at any time. If you stop paying your premiums your cover will stop, your policy will end, and you will receive no benefit. If you have not claimed before the end of your chosen policy term, the policy will end, and no benefit will be paid.
What types of life insurance work well with a pension?
When it comes to having a pension, both whole and term life insurance can offer added protection.
Level term life insurance can act as a form of income replacement while you're still working or early in retirement. It also tends to be cheaper than whole cover as a payout is not guaranteed.
Whole life insurance can be useful if you want your family to have long-term protection before and after retirement. It can also be suitable if you wish to leave an inheritance, though the monthly premiums are often more expensive.
Aside from life insurance cover, you might consider other protection products:
Critical illness cover – Provides a lump sum payout if you’re diagnosed with a serious illness, helping to cover medical costs or lost income.
Income protection insurance – Replaces a portion of your income (typically 50-70% of your gross annual income) if you’re unable to work due to illness or injury.
Where to get advice
If you have a pension and are wondering whether life insurance is still necessary, speaking to our advisers can help you make the right choice. They will look at your pension, your financial situation, and what your family might need in the future to see if extra protection is a good idea.
Some pensions provide support for your loved ones when you pass away, but not all offer enough to cover their needs. By discussing your situation with our advisers, they can provide advice on which options may be suitable.
The process can take different amounts of time depending on your situation. Our advisers will search the market for the best options, explain your choices clearly, and help you through the application.
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