Life insurance: essential for families

• For Moneymagpie readers only, a free life accident policy worth £5,000 just by completing the life insurance comparison form here.
• Shop around for the best deal - there are many different prices for the same basic cover
• Or, if you have a lot of cash now, invest it in a special fund to insure yourself

Life insurance promises (in an insurance kind of a way - i.e. with conditions) that if you die, a sizeable chunk of change will be made out to your family. The good thing about this is that you know your loved ones will be covered financially if you go. A possible drawback – or a possible plus if you're into Agatha Christie novels – can be that you could find you’re worth a lot more to your family dead than you are alive .

Who needs it?

It's essential to take out life insurance if you have children or other dependants who wouldn’t be able to cope if you were not around. Think about what needs to be paid for day by day, year on year: your mortgage, their university fees, the family maintenance and upkeep etc. Or perhaps you have elderly or disabled family members who depend on you for their care and medical treatment. These are the kind of expenses that would need to be covered by a good life insurance policy if you were suddenly not around.

Who doesn't?

If you're single, childless and you don’t have anyone depending on you or your income, don’t bother with life insurance at all. Your banker or another financial salesperson might try to frighten you into taking it out, but you really don't need it. Don't waste your money.

How to find the right policy for you

There are different types of insurance for a start, so you should consider which type would make the most sense for your situation. Also, different policies cover different things so you'll need to think about your lifestyle (your job, hobbies and health) when choosing the right one for you.

It's likely to be a good idea to put your life insurance policy in some form of trust for your family so that  they can benefit from the money sooner rather than later the worst does happen. We have information about these below.

Types of insurance

Typically there are all sorts of different types of life insurance to choose from and get confused by. Essentially, the premium you pay will be down to the length of your policy and the amount you’ve agreed upon to have paid out on your death. However, it also depends on the level of flexibility and 'extras' that you have in the policy.

There are six basic types of life insurance and we're calling them all insurance even though most used be called 'assurance'. (If you're interested, technically assurance refers to a policy  that will definitely pay out, eg after a fixed term, whereas insurance will only be paid out if the worst happens. But all the cool kids in the insurance block are now using the two interchangeably and as we like to be thought of as 'down' with the kids, we're doing the same.)

Anyway... At least one of these kinds of insurance (or assurance) should be right for your circumstances:

• Level Term Insurance 
• Increasing Term Insurance
• Decreasing Term Insurance
• Mortgage Protection Insurance
• Renewable Term Insurance
• Family Income Benefit Insurance

 
Level Term Insurance

This is generally the cheapest and simplest option. It’s sometimes called 'protection only' insurance and guarantees to pay out a set amount if you die within a certain time. You pay a set amount each month, too, which is handy.

However, it doesn’t pay out anything if you live after the term agreed. If you do, then you'll have to negotiate another deal at that point. Be warned that it could be a lot more expensive at that stage - you'll be older and could also be in poorer health.

Increasing Term Insurance

With this one, the cover increases over the years without a need for a medical. However, the amount you pay also rises.

Decreasing Term Insurance

The cover decreases over the years at a flat, fixed rate. You pay less, as well.

Mortgage Protection Insurance

Pretty obviously, this is insurance that is connected to your mortgage. It reduces over time as the amount you still owe on the mortgage goes down.

Renewable Term Insurance

This is a short-term policy that can be renewed at the end of the term without a medical. It is cheaper than most others because it lasts for a shorter time.

Family Income Benefit

This pays a tax-free annual income to your family or other dependants if you die. This is instead of a one-off lump sum. The annual income lasts for a fixed period set by you.


How much should I insure myself for?

The amount you insure yourself (and your partner/spouse) depends on how much you think the family would need without you. Ask yourself:

• Will I need to cover them for school bills, university fees, childcare costs and other expenses?

• Will the mortgage be paid off by another policy if I die, or does it need to be paid?

• Would my spouse be able to fund much of it through their income?

• What other policies and investments would they benefit from if I died (pensions, death-in-service benefit, personal investments etc)?

• What can I actually afford to pay into a policy now, each month?

Do a 'back of an envelope' calculation yourself or create your own spreadsheet if you can do that kind of thing. To find the best value life insurance policy for yourself, look here.

Health and lifestyle issues

The type of policy you go for and the price you pay can also be affected by your lifestyle and health.

Health

If you've had a serious illness or you currently have some health problems, put this on the form. Your smoking and alcohol consumption will influence the type of life insurance you can get, for a start, and how much you will have to pay for it. Your family history is also taken into account when they work out your likely survival rate.

You'll also be asked for your weight and height. Insurers use this to calculate your Body Mass Index (BMI) - one of the measures used to calculate how much you'll have to pay for life cover. Your BMI tells them whether your weight is healthy. The ideal BMI score is between 18.5 and 24.9 - it means a reduced chance of developing signifcant health imbalances. Some insurers automatically increase premiums once someone's BMI reaches 27. Calculate yours here.

You need to be honest about it all - every year there are cases of life insurance companies refusing to pay out because the deceased was not open about their health, alcohol consumption or chronic weight problems.

Your job and your hobbies

If you're a bomb disposal expert, a policeman or even an MP, your life insurance premiums will be higher than, say, someone who works in a life insurance office. You would be surprised at what is deemed a high-risk occupation, so it could be that what seems to you like a mild office job is considered hazardous by a life insurance company. This can put your premiums up.

If you fly light aircraft, go in for bungee-jumping or enjoy off-piste skiing on a regular basis, you will pay for it in your life insurance policy. Potentially dangerous sports like these, diving, parachuting and others will need to be mentioned in your application. You'll probably be asked more detailed questions about how often you do them, where, to what proficiency etc. - so be prepared for that.

Should I put it in a trust?

It's a good idea to put it in a trust - ideally a 'Flexible Trust' (the insurance company should be able to sort this out for you). Putting your life insurance into a trust means that the money from your policy goes to your dependants more directly. It also means that you can control what happens to the money after your death - who gets what, etc. Plus that the it gets passed directly to your family without being bothered by the taxman. They get more cash and they get it quicker, too - about six months quicker, on average.

Checklist

• You must shop around. If you waltz into your bank or mortgage lender expecting a bargain or deal, you’d be wrong. They tend to charge well over the odds.

• You could consider buying separate 'his' and 'hers' policies if you're married, instead of going for the customary joint life, first death policy. It's often cheaper and better to do separate ones. Policies can be on a single life or joint life basis.

• Review your policy every five years or so. Your circumstances could have changed to the point where you don’t need it anymore or you need greater cover.
• Use our comparison tables to find the best deal for your circumstances quickly.

Are there alternatives?

If you have a good deal of spare cash right now, then a better policy than a life insurance policy is to build up your own personal investment pot that would cover your family if you were taken from them suddenly.

As with any type of self-insurance, this is generally better than paying a life company as the money is yours whatever happens – you and your family get the benefit of its growth, and you don’t have to lose money each year in premiums.

Again, though, if this is money you want to earmark for your family, it's a good idea to put it into a trust, probably invested in a solid and safe bond fund or something similar. See our investment pages for more on getting to grips with products and jargon.

However, if you haven’t managed to amass this kind of money, it’s a good idea to get a life insurance policy until you do.

Critical illness insurance

Some people opt for critical illness insurance rather than full life insurance because they feel that is more appropriate for their needs. Our life insurance table also offers critical illness comparisons and our critical illness article has more details on what it is.

Getting started

• Search for the best policy for your needs using our personalised comparison service.