Do I Need Life Insurance? – Forbes
Life insurance in its simplest form – known as ‘term’ cover because it lasts for a specific number of years, or term – is designed to help the people who depend on you cope financially if you die prematurely.
If you have someone who depends on the money you earn to pay the bills, especially your monthly mortgage payments, the emotional impact of your death could be made worse by financial worries.
Likewise, if you look after the home and family while your partner goes to work, think of the practical and financial impact of you not being around. Where would the money come from to pay someone else to do what you do now?
Here’s a look at the kinds of people who need life insurance, and what happens if they die without cover in place.
Who needs life insurance?
If you own a property that’s mortgaged in both your name and your partner’s name, the responsibility to repay the debt will remain with your partner after your death.
Even if your income comprises the majority of your joint income today, your partner will be expected to repay the loan in its entirety using whatever household income they have left.
Add to that the bereavement leave from work they’d need to take following your death and it’s easy to see how mortgage repayments could quickly become a problem if you were to die without a life insurance policy.
With sufficient protection in place, your partner would be able to use the life insurance payout to clear the debt and no longer have to worry about finding the money.
Most mortgage lenders require that you take out a life insurance policy as a requirement of the loan to cover their investment in case you die.
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Life insurance payouts don’t have to be used to clear mortgage debts, however. They can be used to maintain your family’s standard of living – which means it could pay for things like tuition fees, bills, holidays and other debts, expenses and outgoings.
It’s up to you to choose the sum insured on your policy- that’s the size of the payout you’d need to cover your commitments.Generally speaking, the larger the sum insured, the higher your monthly premiums. However, it’s a bad idea to prioritise cheap premiums over adequate protection.
If you have a partner who earns a similar amount to you and isn’t necessarily dependent on your earnings but would struggle to cover everything on a single salary, a joint life insurance policy will provide funds to the survivor and will probably work out cheaper than buying two separate policies.
However, the first claim on a joint policy is also the last, meaning the survivor will then have no cover in place in case they die – putting their dependents (including your children) in potential financial peril.
For this reason, couples who can afford it may prefer to have two policies.
Who doesn’t necessarily need life insurance?
If you’ve no dependents, you don’t necessarily need life insurance. Even if you have a mortgage with an outstanding balance, the lender would reclaim the property and sell it to settle your debt if you were to die.
However, if you plan to leave your property to someone who isn’t a dependent or named on the mortgage, perhaps even a charity, you’d need a life insurance policy to settle the mortgage balance before they could receive it.
What happens to your debts when you die
Your creditors are likely to claim against your estate for settlement of your debts. For example, your home could be sold by your mortgage lender to pay off your mortgage.
If you took out credit as part of a joint agreement like a mortgage or loan, responsibility for the debt passes onto the survivor.
Something like credit card debt will also be recovered from your estate, provided the account is in your name only. This kind of debt won’t be inherited by your relatives if the debt can’t be reclaimed.
An estate that isn’t big enough to clear a person’s debts is called an insolvent estate. In the case of an insolvent estate, debts are reclaimed by creditors in priority order. Secured loans such as mortgages are settled first, then priority debts like taxes, then unsecured debts, such as bills and credit card balances.
How to get the best life insurance
Our life insurance comparison tool will show you prices from a range of insurance providers for the cover you need.
Whether you need a single or joint policy, a level term policy that pays out a set amount no matter when you claim or a decreasing term policy with a payout that decreases over time as your mortgage balance decreases, you’ll be able to compare premiums and policies like for like and feel comfortable you’ve got the best price.
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Tailor cover to suit your needs and gain financial security for your loved ones
