When insurance could make all the difference

Life insurance is relatively cheap for most people but can make a huge impact on the lives of loved ones we leave behind. And, unlike almost all other types of insurance, premiums on life cover are falling as life expectancy increases at a rapid rate. For instance, a 35-year-old male non-smoker can get £100,000 worth of cover on a 20 year level term policy starting at around £10 per month. Yet many people – married and single – choose to go without this most basic of insurance policies.

The main time life insurance – also known as assurance – is bought is at the same time as a house purchase. The extra financial responsibility that a mortgage brings tends to focus the minds of borrowers on what would happen if they – or their partner – died. People in full-time employment are perhaps the most obvious group who need a policy. Without your income, your family may be unable to support themselves or could be hit with unmanageable debts. In a worse-case scenario, they may be unable to cover mortgage costs and be forced to leave the family home.

In the longer term, a payout from life insurance could help provide for your children's future and cover costs such as university fees.

Even if you're not the main breadwinner, your family may struggle to cope financially should something happen to you. For instance, AXA insurance puts the value of a stay-at-home parent at £23,000 per year.

Types of cover

Policies can run for the whole of life or for a set term, such as 20 or 25 years. Level-term insurance pays the same whenever you claim. A decreasing term policy sees the benefit reduce over the course of the policy and the premiums are slightly lower than with a level-term arrangement. Decreasing term is popularly sold alongside mortgages as the idea is that as you pay down the amount owed on the home loan the money you need the insurance to pay out also reduces.

Do I need cover?

Even if you have life insurance, it's important to re-evaluate your level of cover in the event of any major life changes. For example you may need different protection if you take out a joint policy with your spouse and the relationship ends.

A new job or even a promotion could also be justification to re-examine your policy. A higher salary will almost certainly equate to an improved quality of life and therefore a more difficult readjustment without your income.

How much do I need?

Ideally, the payout should free your dependents from the burden of current debts and if possible, provide enough to maintain their lifestyle.

When buying a policy, it's important you plan ahead. Life insurance can be set up with a longer term than usual in many other types of insurance, so it's important that a policy is able to meet your needs today and in the future.

If your main priority is to cover existing debts such as your mortgage, taking out a policy for your total debt should be sufficient. However, if you want to ensure your family is comfortable financially there are a number of things to consider.

* How much would your family income drop?

* What are the family expenses and how much would they change?

* How far will your savings go?

* How much cover do you receive from your employer or company pension?

* Are there any state benefits that provide extra support for your family's needs?

If you feel that you can't afford the premiums on providing large sums of cover then look at your family's priorities. Even £50,000 may be enough cover for them to be able to ride out the financial storms that could follow your death, giving them vital time to sort out their financial future.

Top tips for buying life cover

By setting up your policy in a trust you could avoid paying inheritance tax – which could be as high as 40 per cent.

* Don't forget to investigate any death-in-service benefits offered by your employer; this may reduce the amount of life insurance cover that you need.

* If you are a smoker, giving up will reduce the cost of your premiums; however, don't lie as insurers may investigate and this could lead to a payout being invalid.

* Shop around for the best price and cover; your mortgage provider or bank will be only one provider amongst dozens that you can try.

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