Unfortunately, every 22 minutes a child loses a parent. Despite this, only 50% of UK parents have cover in place to protect their families financially if they were no longer around.
Without adequate life cover, your family could be left in financial disarray at an already very challenging time.
- Could your partner afford the mortgage repayments alone?
- Would they have to increase their working hours?
- Could this mean additional childcare costs?
- Could day-to-day living costs be met?
Depending on your family’s financial stability, this could mean your loved ones would not only have to leave their family home, but also undergo a complete lifestyle change.
However, there are various options available to minimise the financial burden experienced by your family should the worst happen to you.
Let’s take a look at these options.
The most well-known type of cover is traditional life insurance.
Generally speaking, this involves paying a monthly premium for a set period of time, (known as the term). If you pass away during the term, the pay out of a predetermined amount is made to your loved ones.
There are two main types of life insurance, each one suited to cover different aspects within your life.
Level term – Premiums are paid on a monthly basis and if you die a lump sum is paid to your loved ones.
Decreasing term – Premiums are paid on a monthly basis and if you die a pay out is made to your loved ones, however, the value of this sum reduces over time. For this reason, decreasing term tends to be cheaper than level term.
What it is you are looking to cover will determine which type of policy you would choose.
The reducing pay out value of decreasing term life insurance makes it more suited to covering a repayment mortgage as the pay out sum can be set to decline in line with your remaining balance.
However, perhaps you are looking to provide your family with an inheritance too, allowing them to afford a luxury holiday or even just to cover the cost of your funeral so they don’t have to foot the bill. In this case, term life insurance is likely to be more appropriate.
When deciding which type of life insurance is most suited to your situation, the key questions to ask yourself are:
- What is it you are looking to cover?
- What type of pay out would your loved ones benefit from the most?
Family Income Benefit (or FIB)
Life insurance is great for covering large one-off costs, but it can require a lot of discipline and money management skills when used to cover day-to-day living costs such as rent, utility bills, food and hobbies.
Family income benefit offers monthly tax-free payments which can mimic the income of a salary.
As with life insurance, monthly premium payments are made but during the application process, you specify how much it is you would like your loved ones to receive on a monthly basis.
Your policy again lasts for a specified amount of time and if you die during this period, monthly payments will be made to your family for the remainder of the term.
Family income benefit tends to be significantly cheaper than level term life insurance.
This is because, like with decreasing term life insurance, the overall amount you will receive out of the policy will decrease over time in line with the remaining term.
There is a third option Life assurance.
Unlike life insurance which pays out if you die, life assurance pays out when you die.
Premium payments are made for the rest of your life and when you die your loved ones are guaranteed a pay out of a predetermined amount.
However, for parents of dependent children, it is unlikely this will be a cost-effective solution.
It is likely that if your children are still financially dependent, you are also of a younger age Ð Potentially in early adulthood or middle age.
Because premium payments must be made for the rest of your life, the longer you pay into the policy, the higher the likelihood that you will pay more into the policy than your loved ones will receive out.
For this reason, life assurance is more suited to those in later life or in poor health.
Life insurance vs FIB
There are pros and cons with both life insurance and family income benefit and it is likely it will quickly become clear to you which is the best-suited option for you once you determine what it is you are looking to cover.
- Life insurance is great for covering big one-off costs but requires more money management when used for daily living expenses
- Family income benefit is well suited to covering daily living expenses but can make significant expenses such as funeral costs more difficult to cover
- Generally speaking, decreasing term life insurance and family income benefit are significantly cheaper than level term life insurance, although all three types have very differing purposes.
When deciding on which type of cover to take out, you should ask yourself the following questions:
- What am I looking to cover?
- How much can I afford to pay on a monthly basis?
- Which financial areas would experience strain if I were to die?
- What level of money management would my family need to undergo with this type of cover?
Getting the best deal
Regardless of the cover type you choose, it is always beneficial to compare quotes from numerous insurers as pricing can vary significantly.
There are three ways of doing this:
- Carry out independent research, although this can be very time-consuming and frustrating
- Use a price comparison site. These are quick and simple to use but often only compare a small panel of insurers and can often contain a lot of legal jargon
- Use an independent FCA registered life insurance broker. These services are usually free to use, will decipher all legal jargon for you and are completely unbiased, providing you with all the information you need to make your own informed decision.
I hope this article has helped you establish which policy option is right for you.