Life insurance: do you have enough cover?

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By Paul Davies
Know Your Money Editor

Death is not usually something that people like to think about too much, but for those of you with family reliant upon you it could be something well worth thinking about.

Life insurance can help to protect your family from the potential financial damage of death should you no longer be around.

Expenses such as mortgage repayments can be covered and the policy offers financial relief at a time when your family may need it more than ever.

You may wish to ask yourself a number of questions, such as would your family be able to deal with finances without you? Will your children want to go university and would they be able to afford it? And could your other-half afford to pay outgoings without your help?

Considering taking out life insurance and finding the right deal for you could give you peace of mind that your family is protected.

Despite most people wanting to protect their families, research from AXA revealed that Brits are under-insured by £2.5 trillion, meaning that for the average family there is a shortfall of £176,776.

In spite of this, many people seem to believe that they are adequately covered, with more than one in three of those surveyed by AXA saying that they thought they were well insured against life risks.

What are the options?

There are two kinds of individual life insurance policies available - decreasing-term cover - also known as mortgage life insurance - and level-term cover.

Decreasing-term cover is usually sold along with a mortgage. It pays out if you die during the term of the policy and the size of the payout decreases in line with your mortgage.

For this reason decreasing-term cover can prove to be cheaper than level-term policies.

However, level-term cover may prove to be a better option unless you are purposefully looking to keep costs as low as possible.

Level-term cover pays out a fixed amount of money if you die during the term of the policy and it could be vital if you have a mortgage or large debts, as well as people reliant upon you.

Couples may want to consider taking out a joint life-insurance policy as it can prove to be cheaper, however, there are some potential drawbacks to doing so.

A joint policy only pays out in the event of the first death, meaning that the other partner may then need to take out their own individual policy at a later date.

If both partners were to die at the same time then their families would only benefit from a single payment, whereas two policies would mean two payments being made.

Another factor to consider is that should partners go their separate ways then the policy could be put into jeopardy. If new partners and children are involved following the death then it can be difficult to determine who inherits the money.

Consumers could find that two separate policies should cost roughly the same price and both will offer payouts.

In cases where the salaries of each partner in the household are vastly different, it could be worth taking out a policy each. These can then be tailored to ensure that there is adequate cover in place for each person.

Those considering level-term cover should opt for the cheapest policy as the payout is fixed.

Of course, it is still important to ensure the company is reputable and the premiums (monthly payments) are fixed and not reviewable.

Important Notice
This guide is intended for general information only and is not intended as, and does not constitute, any form of advice, recommendation or endorsement by us of any particular product(s) or services and you should rely on your own further research and professional advice in relation to your specific requirements and circumstances before purchasing any products or services. Use of this guide is subject to the Terms of Use of the KnowYourMoney site.