Is Life Insurance Worth It? – Forbes
Life insurance is designed to pay out to your dependents ( known as beneficiaries) in the event you die unexpectedly within a specified period, called the ‘term’. Many policies will pay out if you are diagnosed with a terminal illness with less than 12 months to live.
But is life insurance worth it? The answer will depend entirely on your circumstances, priorities and personal outlook. Let’s take a closer look.
(There is a type of cover called ‘whole life’ insurance which pays out whenever you die – more on this below – but ‘term’ insurance is the product of interest to those looking to protect their family’s financial situation if they die prematurely.)
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Understanding the basics
Life insurance usually pays out a tax-free lump sum or monthly income to your beneficiaries if you die within the policy term. Whoever receives the money can spend it on whatever they wish.
However, payouts are usually put towards clearing a mortgage or other debt, covering household bills and paying for general living costs ranging from childcare to the weekly shop.
Premiums (typically paid monthly to the insurer) are calculated using factors such as your age, health, occupation, and how long you want the policy to run for. They will also depend on the type of policy you want, which we’ve explained more about below.
Main types of life insurance
Life insurance comes in various forms. You should choose the type that best suits the needs of you and those you want to financially protect. Here’s an outline.
Term life insurance
With this type of policy a payout is made if you die within the stated term, which is often 10 or 20 years but can be chosen by you when you buy. It is the most common (and cheapest) form of life insurance.
Within term life insurance, there are four subcategories of policy.
Decreasing term. This cover is ideal if you know your financial commitments will decrease over time, as it is designed to pay out less as the term proceeds. For example, decreasing term life insurance can be set up so the payout falls in line with your mortgage balance as you pay more of it off.
Level term. This type of term cover pays out a fixed amount no matter how far into the term you die. That’s why it can be ideal for those with younger children or larger families. It also works well for those with an interest-only mortgage, where the capital debt remains the same over time. As the payout is fixed, premiums for level term policies are higher than for decreasing term policies.
Increasing term. The type of term policy factors in potential rises in inflation (the cost of living), and so the payout increases by a fixed amount each year for the term. For this reason, it’s the most expensive kind of term cover available.
Family income benefit. Instead of a lump sum, a family income benefit policy pays out each month from the time a claim is made to the scheduled end of the term. This makes the potential payout lower than for a lump sum policy, so the premiums are lower.
On all term policies, if you outlive the stated term, your cover will come to an end and, if necessary, you will need to purchase a new policy. There is no refund of premiums if you survive to the end of the term.
Whole-of-life cover
Unlike term life insurance, whole-of-life cover will pay out to your beneficiaries, regardless of when you die. You will either need to pay premiums until your death, or up to an age stated within the policy, say 80, but still receive cover until the end of your life.
As whole-of-life insurance comes with a guaranteed payout, it’s often used to fund funeral costs or to offset an inheritance tax bill. Inheritance tax is currently payable at a rate of 40% on assets over £325,000.
It’s worth noting here that life insurance payouts themselves are counted for inheritance tax purposes, although you could get around this by writing the policy in Trust. Your life insurer will explain this to you when you buy your policy.
Because whole-of-life cover guarantees a payout, premiums are higher than for term life insurance. And, if you opt for a whole-of-life policy that’s linked to an investment fund, your premiums could even rise if it doesn’t perform well.
Is life insurance worth it?
The answer to this question depends on a number of factors, the central one being whether you have anyone who relies on you financially. As well as children or step-children, that could be a spouse, partner or even a parent.
Life insurance is a particularly good idea if you have a mortgage that would still need to be paid if your income was to suddenly disappear. But there are other (rising) costs that would need to be considered too, ranging from energy bills to council tax, to childcare.
If you already have life insurance, certain milestone events such as getting married, having children and buying a house may also warrant upping your level of cover. While this may trigger higher premiums, these should be weighed up against the financial security the appropriate level of cover can provide.
Whie premiums will depend on a number of factors including the cover amount, type of policy, your medical history, age and occupation, in some cases, it could be cheaper than you might think.
A quick search on our life insurance comparison tool for example, shows that £200,000 worth of level term cover for a single applicant aged 30 comes in at less than £10 a month.
It’s also worth bearing in mind that, morbid as it sounds, most life insurance policies provide cover for terminal illness where you are given less than 12 months to live. They generally also cover suicide after an initial 12 or 24 month exclusion period. Alway check the small print of any policy.
What other types of life insurance-related policies are there?
Depending on the needs of you and your loved ones, you may also want to consider other types of life insurance such as:
Mortgage life insurance: This is a decreasing term policy which is tied specifically to your mortgageOver-50s life insurance: Policies for those typically aged between 50 and 80, but essentially another name for whole-of-life coverCritical illness: Pays out a regular income if an accident or illness means you’re unable to work long-term. It can be bolted onto life insurance policies at a cost.
Should I take a single or joint policy?
If you are satisfied that life insurance is for you, you’ll need to consider whether a single life or joint life policy is most suitable.
Single life insurance is exactly what it says on the tin, covering only one person.
Joint life insurance is for couples. Most insurers require that the policyholders are married or in a civil partnership, but others just require you live in the same household.
You’ll need to pay just one premium for the two of you, with just one payout on whoever dies first.
A joint policy will usually be cheaper than two single ones, but although you will need to pay two premiums, you will potentially receive two payouts.
What if I can’t pay my premiums?
If you stop paying your monthly premiums, your life cover will simply lapse.
However, many life insurance policies offer ‘a waiver of premium’. This means that, if an accident or illness renders you unable to work, your life insurance premiums will be covered automatically for a certain period.
What happens if I don’t have life insurance?
Without life insurance in place, anyone you leave behind could be left with crippling financial worries at what will already be a distressing time. And it could be a comfort that the vast majority of life insurance claims are paid. Aviva paid out 99.3% of life insurance claims in 2020 for example, while Vitality paid out 99.6%.
However, it’s unlikely you’ll need life insurance in the following scenarios.
you have no dependentsyou already have adequate cover, through your employment for exampleyour partner can afford to look after your family if you were not aroundyou have another financial safety net in place, such as adequate savings or an investment property that can be soldyou qualify for state benefits as you’re on a low income.
How do I compare life insurance policies?
To find the best life insurance to suit your circumstances, enter a few details into our life insurance comparison tool. You can get quotes in seconds.
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