When you begin to look into life insurance policies, the first thing to consider is why you need one.
Many people will only begin to think about financial protection when they start a family, as they recognise that those left behind in the event of their death will need some form of assistance.
It is important to consider how much money your family will need should your income stream disappear, or how much will be needed to pay for childcare costs, for example, should a stay-at-home parent pass away.
However, life insurance is not just for families with children. Single people and couples may decide that life insurance is a good idea as this can be used to help cover funeral costs or mortgage payments if you own a home with a partner.
Different types of life insurance
There is a range of different options when it comes to life insurance policies.
If you are a couple or family, then the two main options available are single or joint policies.
Joint life insurance
Joint life insurance policies are most appropriate for couples, particularly those who share a home and therefore a mortgage commitment.
Within joint life insurance policies you can choose for them to pay out on the first death, or you can opt for a ‘last survivor’ policy, which will pay the money when you have both died.
For anyone who will need help with mortgage repayments, the most sensible option is the policy which pays out when just one of the couple dies.
Many joint life insurance policies will pay off the remaining balance of the mortgage should one of you pass away.
Single life insurance
However, if you have dependent children then taking out single life insurance policies could be more sensible.
There are many reasons for this. First and foremost, it allows you to both get the right level of cover for your individual situations, for example, if one of you is a higher earner than the other.
You may also be able to get more favourable rates if you are healthier than your partner, reducing the amount you have to pay in premiums.
If you have children and one of you dies, then the other will still need life insurance to ensure they are provided for until they are old enough to be independent.
With a joint policy, you will need to claim – and therefore end the cover – if one of you dies.
However, with a single policy, your protection will be entirely separate, allowing you to avoid any problems of this kind.
Term insurance
Whether you choose single or joint cover, there are some other things you will need to consider when looking at the type of life insurance to buy.
The simplest of the policies on offer is protection-only or term insurance. This will pay out a specified amount should you die within a certain number of years, laid out in the policy.
Should you survive past this point, then you will receive nothing.
Within the branch of protection-only insurance, you can also choose whole-of-life policies.
As the name suggests, they pay out regardless of when you die. Unlike protection-only insurance, the policy will not pay out a specified amount but will build up an investment value over the course of its life.
Endowment policies
Endowment policies are another option. Like term insurance policies, they run for a specified period of time, but unlike term cover, they will pay out whether you die or not.
However, these are often an expensive option when it comes to life insurance and are not ideal if the primary reason you need the policy is to provide protection to dependents.
Other things to think about
When looking at life insurance cover, you should ensure that all of your main debts are covered by the policy.
As well as mortgages, you should consider anything you owe in the form of loans or credit card debt.
Putting your life insurance policy in trust is advisable, as this means that it is not subject to inheritance tax.
The process of doing this is completely free and it means that any payouts made in the event of your death will not be diminished by money being paid out for inheritance tax.
Putting your cover in trust will also speed up the payout process. This is because your life insurance policy will be excluded from your estate when you die, so the money can be paid without having to wait for probate.
