Less than a third of adults, with children in the UK, have life insurance. It is by no means compulsory to take out a policy, though you will be required to do so if you take out a mortgage, but if you have dependents you should consider the peace of mind that taking out a policy will bring. Here are five factors that need thinking about.
It’s easy to assume that because your children are in state education that there is little or no cost involved, but it’s a staggering fact that according to recent estimates it will cost you in the region of £200,000 to raise a child from birth to the age of twenty-one and a lot more of that than you think will go on education costs. Initially of course it’s nursery education, which is likely to involve fees and transport costs. Then, when children begin school there will be in addition, uniform and equipment costs and as the child gets older and becomes involved in trips and extra-curricular activities, these costs will increase. Ultimately there are university costs, which are impossible to predict, but which are likely to be hefty.
Choosing an adult beneficiary
Most people will choose their partner, but this doesn’t have to be the case, it could be a parent, sibling, one of your older adult children or even a trust. You can even name more than one beneficiary and stipulate what percentage of the payment should go to each. It’s worth considering naming a secondary beneficiary who would receive the payment if your first choice were unable to do so. Whatever decision you make, always ensure that the information that you are providing is accurate, that the beneficiary is aware that they are a beneficiary and that you continue to update the information as necessary.
Choosing a policy that is right for you
Don’t just follow the advice of your mortgage lender, shop around by using a comparison website. There’s a bewildering variety of life insurance packages on offer and since you are making an important investment in the future of your family it’s well worth taking the time to ensure that you are making the best possible financial investment.
Stay at home parents need insurance too
Your first thought may be that life insurance is only necessary to cover the absence of a regular income, but you should also consider what it would cost to replace the work done by a stay at home partner. The absence of cleaning, transport and childcare would all result in a financial cost.
Understand the difference between level-term and decreasing cover
Most mortgage holders have decreasing term cover. This means that the cover reduces as the size of the debt shrinks so that a pay-out during the latter period of the cover is likely to be very small. It’s a popular option because it offers the cheapest premiums, but it does mean that your family could be left in financial hardship. Level-term cover will pay out a fixed sum at any point during the period of cover. Increasing-term cover will pay out increasingly larger sums to match inflation, but as you would expect, premiums are high.
Life Insurance Calculator (L&G) – A quick tool for calculating how much cover you might need.
Compare The Market – Comparison tool for analysing life insurance providers.
Money Advice Service – Information regarding childcare costs.