What is life insurance?
Life insurance is essentially financial protection for our loved ones to protect against a worst-case scenario. You choose a cover amount (a sum assured) the length of the policy (a term) and pay a monthly fee (a premium) to receive the cover. If you pass away during the policy term your beneficiaries receive a cash pay out.
There are multiple types of life insurance each better suited to protecting different aspects of our life and varying in price.
For example, mortgage life insurance (also known as mortgage protection insurance) is designed just to cover a mortgage balance. This type of policy is different from standard life insurance in two ways. One, the death benefit is paid direct to the mortgage lender, not a beneficiary of your choice. Two, the pay out sum equates to the mortgage balance, or partial balance depending on your chosen sum assured.
Alternatively, there is term life insurance which covers you for a specified period of time (or term) and has a set end date. Term lengths are commonly 5, 10, 15, 25 or 30 years.
Usually, term cover is the cheapest policy option because the risk to the insurer reduces over time and there is a chance you could outlive the policy and therefore a pay out does not materialise.
Why might you need life insurance?
Life insurance protects those who depend on us financially if we are no longer around to provide.
Commonly life insurance is set up to cover;
- 1. A mortgage, protecting the family home
- 2. Future family living costs (car, food, drink, clothing, leisure)
- 3. Children’s’ education and associated costs
- 4. Utility bills (gas, electric, water, internet, telephone)
- 5. Home maintenance (building works, taxes)
- 6. An inheritance for children/grandchildren
- 7. Rising funeral expenses (average burial cost $7,640)
Is life insurance compulsory to secure a mortgage?
No. Contrary to popular belief it is not a legal requirement to take out life insurance in order to secure a mortgage. However, it usually makes financial sense to put some protection in place.
Ask yourself the challenging question, what would happen to the family home if you were no longer around? Could your partner afford the long-term monthly mortgage repayments?
If the answer is no, then it makes sense to arrange some form of cover. Whilst securing the family home can never replace a loved one, it will at least lessen the financial burden at an already stressful time for your family.
Do renters need life insurance too?
People usually take out life insurance after a significant life event, such as having a child, losing a loved one, getting married and as detailed above purchasing a property. In more recent times the devastating impact of the COVID-19 pandemic has also been a trigger for people to consider life insurance for the first time.
But do those who rent a home require life insurance too?
The answer is, it depends. If you rent and have no dependants then you may not need life insurance.
In contrast, if you have children who rely on you financially, especially if they are young, it is usually a very good idea to have protection in place.
In the US it is estimated that it costs on average $233,610 to raise a child to the age of 17. In the UK this figure is estimated to be £152,747 (to the age of 18) and rising rapidly.
Lastly, it is important to remember that life insurance gets more expensive as we age, as statistically a pay out becomes more likely. Therefore, strangely the best time to lock-in an affordable premium is often before we take on a family and a mortgage. You can set the term for up to 40 years to ensure you are comprehensively covered as your life circumstances change.
How to buy life insurance in 2022
Due to different underwriting processes employed by insurers the cost of life insurance can vary significantly. As a result, it is always recommended to compare multiple quotes from different providers to secure the best available deal.
When purchasing a home often the real-estate agent and/or the mortgage lender you use will partner with a preferred provider (earning a commission), however this may not provide you with the best price.
A great way of comparing quotes from the best life insurance providers, often free of charge, is to use a comparison website or a regulated broker.
For our UK audience, Reassured Ltd provide an award-winning free quote comparison service, they can also help you through the application process and write your policy in trust.
5 Top tips to secure the lowest premium:
- 1) Compare multiple quotes from different life insurance providers
- 2) Secure life insurance whilst you are young and lock-in a low premium long-term
- 3) Do not inflate your premiums unnecessarily by taking our more cover than you need or an overly long term. Take the time to calculate how much cover you require and for how long (for example until the mortgage is paid off and/or until the children are financially independent)
- 4) Always be open and honest on your application to make sure your policy is valid
- 5) If you receive cover through your employer, like death in service, factor this into your cover amount. (Please note this work placed benefit will not transfer with you if you change jobs)
Although life insurance is often a difficult subject to broch, we hope this article has helped inform you of the benefits to having cover in place and the key considerations.
If the last two years has taught us anything it is that life can be fragile, and no one knows what is around the corner. Having life insurance in place provides reassuring peace of mind that our home can be paid off and our loved ones living standards maintained if we are no longer around.