No one wants to consider what would happen to their loved ones if they were no longer around. However, putting financial provisions in place could one day be one of the most important things you ever do. A good way of providing this security in is to take out a life insurance insurance policy for parents.
Did you know that if you are young and healthy this could cost as little as 20p-a-day?
A policy pay out could be used to:
- Clear your mortgage
- Meet future family living costs
- Fund childcare expenses
- Pay off outstanding debts
- Basically whatever your loved ones require.
- Regardless of your intentions, arranging life cover can be a confusing task.
- Often it is forgotten amongst the many things us parents have to arrange.
We asked award-winning brokerage Reassured what the 5 top considerations are when arranging a life insurance policy for parents.
1) Amount of cover (£)
When choosing the amount of life insurance cover you need, it can feel a lot like stabbing in the dark and plucking a figure out of thin air.
But taking out more life insurance than you need can leave you paying more than you need to, and not taking out enough cover can leave your loved ones being unprotected.
The key to calculating how much life insurance you need is determining what it is you are looking to protect.
Typically, people take out life insurance for one of the following reasons:
- Protect the family home
- Pay off any debts
- Fund day-to-day living expenses
- Cover funeral costs
- Provide an inheritance
- When determining the sum assured you require, you should look at what it is you are looking to cover and the total sum which would be required to fund this.
For example, if you have £20,000 outstanding debt, a mortgage of £100,000 and would like to provide an inheritance of £50,000, in total you would require a sum assured of at least £170,000.
When calculating this amount, it is also important to factor in inflation and the rising costs of living.
Whilst a sum of £170,000 may seem significant today, take into account 10 or more years of inflation (depending on the term of your policy) and the sum assured may not be so impressive.
Once you have calculated how much life insurance cover you need, you then need to consider your budget and whether or not you will be able to afford the monthly premiums required for this level of cover.
Whilst the cost of monthly premium payments may be affordable for your current circumstances, it is always important to factor in financial changes which may occur in the future.
For example, if you plan to have more children, this is likely to put a strain on your household budget, detracting from the amount of disposable income you have to pay towards life insurance.
Equally, if the term of your life insurance continues into retirement, you need to consider whether or not your monthly premiums will be affordable on a pension.
Missing a payment can result in your life insurance policy becoming invalid. Therefore, it is essential to ensure you can keep up with these payments to avoid your loved ones being unprotected.
3) Type of cover
Type of cover combines both what it is you are looking to cover and the amount of cover you can afford.
There are a wide range of life insurance policies available, each type more suited to covering a particular aspect within your life and costing varying amounts.
Here is a brief overview of the various types of cover available, their typical purpose of cover and how expensive they are in comparison.
Term-Based Life Insurance
Generally speaking, term-based life insurance is cheaper than life assurance because it only covers you for a finite amount of time and a pay out is only made if you die within the term.
Level term life insurance – The sum assured with level term life insurance holds its value throughout the policy. It is often used to provide an inheritance or cover the cost of your funeral. It tends to be more expensive than decreasing life insurance but cheaper than life assurance.
Decreasing term life insurance – With decreasing term life insurance the sum assured decreases in value over the term of the policy. For this reason, it is best suited to covering a repayment mortgage as it can be set to reduce at the same rate as the remaining balance. This is usually the cheapest type of life cover.
Family income benefit – FIB is a far less well know policy option, which could work for you. Instead of paying out a cash lump sum, here regular monthly payments are issued for the remainder of the term.
The monthly payments effectively replace an income and avoid the problems that come with investing, budgeting and managing a large lump sum.
As mentioned, life assurance tends to be more expensive than life insurance because it runs for the rest of your life and as a result, guarantees a pay out.
Over 50s plan – Over 50s plans are best suited to those in later life who cannot get life insurance cover due to health-related issues. This is because acceptance is not determined by your health status.
The pay out sum holds its value throughout the length of the policy and a pay out is guaranteed to your loved ones. This policy type is often used to cover the cost of a funeral or provide an inheritance.
Due to the lack of medical information required, the insurer mitigates their risk by charging higher monthly premiums, therefore, this policy type can be expensive dependant on your age and cover amount.
Whole of life insurance – Like an over 50s plan, the sum of a whole of life policy holds its value and premium payments are made for the rest for your life. However, because this policy type takes into account your medical wellbeing, it can end up cheaper than an over 50s plan if you are in good health.
The pay out from this policy type tends to be used for very similar to that of an over 50s plan.
When choosing which type of life insurance policy will be best suited to you, it is important to take into consideration what it is you are looking to cover and what your budget can afford.
4) Length of cover
Next you need to consider how long you will require your policy to last. This is strongly influenced by what it is you are looking to cover.
For example, if you are looking to cover your mortgage, you are likely going to set the policy term to mimic that of your remaining mortgage agreement.
Whilst if you are looking to leave money to cover the day to day costs of family living, you may set your policy term to cover your loved ones until your children are of an age they will be financially independent.
The length of your policy may also be determined by your age.
For example, many term-based life insurance policies will only offer cover until a certain age, i.e. 84 years old. Therefore, if you are in your 50s, your term length may be determined by the upper age limit available.
5) Finding the best quotes
The price you pay for life insurance can differ significantly from insurer to insurer, making it essential to compare quotes to ensure you receive the most cost-effective solution to suit your needs.
There are three ways you can carry out this process.
1. Carry out the analysis manually
You could check each insurers website individually and carry out your own analysis to determine which insurer will provide you with the best cover at the most effective cost. However, this can be extremely time-consuming and frustrating.
2. Use a price comparison website
Whilst this is a much easier process than carrying out the research yourself, price comparison websites often only compare a small number of insurers. It also requires you to determine which aspects of the available policies best suit your needs as well as having to decipher all the technical jargon associated with making an application.
3. Use an FCA registered life insurance broker
Services offered by a broker are free of charge and will provide you with quotes from a wide array of insurance providers. They will help provide you with the information you need and will explain anything you don’t understand, allowing you to make an informed decision on what you feel is the right solution for you.
Arranging your life insurance
So there you have it, the 5 key things to consider before arranging your life insurance:
- How much life insurance do you need?
- What budget do you have to spend?
- What type of policy do you require?
- How long do you need the cover to last?
- How are you going to make sure you get the best deal?
Arranging life insurance cover doesn’t have to be as difficult as it may first appear and could change the future of your family if the worst were to happen to you.
*This is a collaborative post