Life cover, also known as life insurance, is designed to provide a financial payout to your loved ones if you die during the policy term. While nobody likes to think about what would happen after their death, having the right level of life cover in place can help protect the people who depend on you financially.
For homeowners, life cover can also be an important consideration when taking out a mortgage. A suitable policy could help your family manage outstanding mortgage payments and other household costs if you were no longer around to contribute financially.
But what exactly is life cover, how does it work, and how much cover might you need?
What is Life Cover?
Life cover is a type of insurance policy that pays out a lump sum if you die while the policy is active and the claim meets the terms and conditions of the policy.
You pay an agreed premium, usually monthly, in exchange for the financial protection provided by the policy. If you die during the policy term, your insurer can pay the agreed amount to your beneficiaries or estate, depending on how the policy has been arranged.
The money could potentially be used to cover a range of expenses, including:
- Mortgage repayments
- Rent or other housing costs
- Household bills
- Childcare and education costs
- Outstanding debts
- Funeral expenses
- Everyday living costs
- Other financial commitments
The purpose of life cover is to provide financial support at a time when your family may be facing significant emotional and financial uncertainty.
How does Life Insurance work?
When you apply for life insurance, the insurer will assess your circumstances to determine whether they can offer you cover and, if so, at what cost.
Factors considered can include your age, health, lifestyle, occupation and the amount and type of cover you require.
You will normally choose:
- The amount of cover you want
- How long you want the policy to last
- The type of life insurance policy
- Who should benefit from the policy
You then pay the agreed premium throughout the policy term.
If you die while the policy is active, the insurer will assess the claim against the policy terms. If the claim is accepted, the policy will pay out according to the terms of your cover.
What are the different types of Life Cover?
There are several types of life insurance available, and the most appropriate option will depend on your circumstances and financial objectives.
Level Term Life Insurance
With level term life insurance, the amount of cover generally remains the same throughout the policy term.
For example, you could take out £250,000 of cover for 25 years. If you die during the policy term and the claim meets the policy conditions, the insurer would generally pay the agreed £250,000.
Level term cover can be useful if you want to leave a fixed amount of money to your loved ones or provide a lump sum that could help with mortgage and household costs.
Decreasing Term Life Insurance
With decreasing term life insurance, the amount of cover reduces over time.
This type of policy is commonly associated with mortgage protection because the amount owed on a repayment mortgage will usually reduce as you make your monthly repayments.
The level of cover decreases throughout the policy term, meaning it may be cheaper than an equivalent level term policy.
However, it is important to make sure the policy is suitable for the mortgage or financial commitment you want it to protect.
Whole of Life Insurance
Whole of life insurance is designed to provide cover for the rest of your life, provided the policy remains in force, and you continue to meet its requirements.
Unlike term life insurance, there isn't a fixed end date at which the life cover automatically stops.
Whole of life policies can be more complex and may have different costs and features compared with term insurance, so professional advice can be useful when considering this type of cover.
Do I need Life Cover for a mortgage?
Life insurance isn't automatically required for every mortgage, but it can be an important consideration if you have people who rely on your income or would struggle to manage the mortgage without you.
For example, if you and your partner have a joint mortgage and one of you dies, the surviving partner could potentially be left responsible for the mortgage repayments and other household expenses.
A suitable life insurance policy could provide a lump sum that may be used towards the outstanding mortgage.
Whether you need life cover, and how much you need, will depend on your personal and financial circumstances.
How much Life Cover do I need?
There isn't a single amount of life cover that is suitable for everyone.
When deciding how much cover you need, consider your existing financial commitments and the people who depend on you.
You may want to take into account:
- Your outstanding mortgage balance
- Other debts
- Your household's monthly expenditure
- Your partner's income
- The number and age of your children
- Future education or childcare costs
- Savings and other assets
- Existing employee benefits or insurance policies
- Any financial support your family may receive
For example, someone with a large mortgage and dependent children may have different protection needs from someone who has no mortgage and no financial dependants.
It can therefore be helpful to review your financial circumstances rather than simply choosing an arbitrary level of cover.
How much does Life Cover cost?
The cost of life insurance varies from person to person.
Insurers may consider factors such as:
- Your age
- Your health
- Your lifestyle
- Whether you smoke
- Your occupation
- The amount of cover required
- The length of the policy
- The type of policy selected
Generally, taking out life cover when you are younger can mean lower premiums, although the cost will depend on your individual circumstances and the insurer's assessment.
It's important to compare policies based on more than just the monthly premium. The amount of cover, policy term, exclusions and conditions should all be considered.
Life Cover vs Income Protection
Life insurance and income protection are designed to protect against different financial risks.
Life cover is generally designed to provide a payout following your death.
Income protection, on the other hand, is designed to provide an income if you are unable to work because of illness or injury, subject to the terms of the policy.
For some people, having both types of protection may be appropriate because they address different financial risks.
What happens if you don't have Life Cover?
If you die without life insurance, your family won't have access to a life insurance payout to help cover the financial commitments you leave behind.
Depending on your circumstances, they may need to rely on savings, other assets, existing benefits or their own income to meet ongoing costs.
For homeowners, this could potentially mean that the surviving household has to continue making mortgage repayments without the deceased person's income.
This doesn't necessarily mean everyone needs life cover. However, it is worth considering whether the people who depend on you financially would be able to cope if your income disappeared.
Should I put my Life Insurance in trust?
Depending on your circumstances, you may want to consider placing a life insurance policy in trust.
A policy written in trust can provide certain advantages, including potentially allowing the proceeds to be paid directly to the chosen beneficiaries rather than forming part of your estate.
There can also be potential inheritance tax considerations, although the rules and implications can be complicated.
A trust is a legal arrangement, so you should consider obtaining appropriate professional advice before deciding whether this is suitable for you.
When should I take out Life Cover?
There isn't necessarily a single "right" time to take out life insurance.
You may want to consider life cover when a significant financial responsibility arises, such as:
- Buying your first home
- Taking out a mortgage
- Getting married or entering a civil partnership
- Having children
- Becoming financially responsible for another person
- Starting a business
- Taking on significant financial commitments
It can also be worth reviewing existing protection if your circumstances change.
For example, moving house, increasing your mortgage, having another child or experiencing a significant change in income could mean your existing level of cover is no longer appropriate.
Reviewing your Life Insurance
Taking out life cover isn't necessarily a case of arranging a policy and forgetting about it.
Your financial circumstances can change over time, so it can be sensible to review your protection periodically.
You may need more cover if your mortgage increases or your family grows. Alternatively, your protection needs could change if you pay off significant debts, build up savings or your children become financially independent.
Regular reviews can help you determine whether your existing policy continues to meet your needs.
Get advice about Life Cover
Choosing life insurance can be complicated, particularly when you're deciding how much cover you need and which type of policy is appropriate.
A mortgage or protection adviser can assess your circumstances and explain the different types of life cover available. Here at View Finance, we have a team of expert insurance brokers available who are dedicated to providing specialist life cover advice for a wide range of scenarios. They can also help you consider how your mortgage, income, dependants and other financial commitments could affect your protection needs.
The most suitable policy will depend on your individual circumstances, so it's important to understand what you're buying and what the policy does and doesn't cover before committing.
If you’d like further information about life cover policies we have available here at View Finance, then get in touch with us today - we’re always pleased to help.
