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Try as we might, we can’t control everything in life. That’s where insurance comes in. The right cover can protect you when things don’t go to plan, letting you sleep easy at night.
Life insurance is one of those things that not everybody likes thinking about, but the truth is that it can offer you (and your family) some very valuable peace of mind. And once it’s in place, you can pretty much forget about it and rest easy in the knowledge that you’ve taken care of the big stuff.
What is life insurance, anyway?
In its simplest form, life insurance helps financially protect your family if (or when) you pass away. It’s usually the biggest earner who takes out life insurance, but not always.
There are a few good reasons to get life insurance, including:
- Ensuring your family can pay the mortgage after your death
- Making sure your family can pay for your funeral
- Paying for your dependents if you’re no longer there to look after them.
There are a few different kinds of life insurance, and each one tends to have a different purpose. This is because if you’re a young, high earner your priority might be to make sure your family can pay the mortgage, but if you’re older, it might be to ensure you leave an inheritance.
Let’s take a quick look at the different types.
Term insurance (AKA ‘level term’)
Term insurance means your family will be paid if you die within a specific time frame. The insurance only covers this time frame, which means that if you pass away afterwards, your family isn’t covered.
Hattie and her husband Tom have two children. They have a mortgage on their house which is due to be paid off in twenty years. Hattie is the highest earner, and if the worst were to happen, Tom wouldn’t be able to pay the mortgage by himself.
Hattie takes out term life insurance that covers her for the next twenty years. So if she dies before then, her family will still be able to pay the mortgage. She isn’t interested in extending her cover beyond then, because in twenty years they will own the house outright and insurance won’t be as necessary.
There are other types of term insurance you could get:
- With decreasing term insurance the amount of money your family would get falls every year that you’re still alive. That’s because the amount you owe on your mortgage is also getting smaller every year, so your family would need less to cover the cost. The advantage is that your annual premiums are lower than if you had a level or increasing term policy.
- With increasing term insurance the opposite is true. This means your premiums will rise every year, but the payout will be linked to increasing inflation.
You can also get renewable term insurance which lets you extend the policy after the fixed term is up, if you want. And with joint life insurance, both you and your partner are covered if one of you passes away.
With whole-of-life cover, your dependents will be paid no matter when you die. Whole-of-life cover is usually more expensive than term insurance, because the insurer knows that they will definitely pay out at some point (as much as we would all like to be immortal).
You might wonder what the point is – after all, instead of paying the insurer every month, couldn’t you just put the money aside for when your family needs it?
Well, yes – which is why not many people choose this type of insurance. But it does have one main advantage. When you pass away your family will get a lump sum for the insurer, but unlike inherited money, they won’t have to pay inheritance tax on the payout.
Taking out life insurance is a good idea for many people, but it’s important to choose the type that will benefit you and your family. The best way to do it is to get advice from your insurance broker, who will listen to your needs and help you find the cover that suits you.
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