In assessing whether life insurance is needed, let’s start by looking at what life insurance is and how it works. Life insurance in essence provides a safeguard for your dependants. It can be used to pay off your debts and/or support your dependants by replacing some or all of your income in the event that you die before them.
Life insurance works as follows: you pay a regular sum (a premium) to an insurance company and then they pay out a lump sum, to a named person (beneficiary) in the event of your death.
The question of whether life insurance is needed, therefore, will depend primarily on whether you have loved ones that you would want to ensure were provided for in the event of your untimely demise? If the answer is no, then life insurance would clearly be unnecessary. For example, it would make no sense for a single man (or woman) to take out life insurance if there was no-one that he (or she) needed to provide for. Similarly, if your wife is a millionaire, then you maybe don’t need life insurance to safeguard her future!
For those who do have dependants (typically a spouse and/or children) who would suffer in the event of your premature death, life insurance is usually one of the core financial products that you should have. This is particularly the case where you hold a mortgage as you wouldn’t want that mortgage debt to fall to your dependants to pay off. A key thing to be aware of, however, is that life insurance only pays out if you die. It won’t pay out if you became too ill to work – you’d need critical illness cover for that scenario. (Note: At present, about a quarter of households don’t have enough life insurance to pay off their mortgage if the main breadwinner were to die! Source: http://www.fool.co.uk/insurance/information/life-insurance.aspx )
There are several types of life insurance policies. I’ve listed some of the main ones below:
1. Level term life insurance. As a description, level term insurance is a bit jargony for my liking. How it works, though, is quite straightforward. You pay a flat monthly amount for a set period and, if you die during that period, the insurance company will pay out a pre-agreed amount.
An example of how it might be used is where a parent takes out a 20 year policy, with their aim being to make sure that their kids would be financially okay should the parent die whilst they’re growing up. The person taking out the insurance hopes that there won’t be a need for the policy to be paid out on, but has the peace of mind of knowing that, if the worst happens, their loved ones won’t be left destitute.
2. Decreasing term life insurance. With this type of life insurance, your monthly payments stay the same for a set period but the amount that would be paid out decreases every year. This is commonly taken alongside a repayment mortgage, but may also be useful where dependants are expected to grow up and become financially solvent but where you would still want some cover to cater for your spouse should you die.
3. Whole of life policies. These policies are pretty much as the name implies, in that they provide cover right up until death, provided that you’ve kept up the premiums.
The type of life insurance that’s best for you will depend on your personal circumstances and may change as you go through various life-stage events such as getting married, getting a mortgage, having kids, etc.
To conclude then, life insurance will be needed where you have dependants who would be financially inconvenienced if you were to suddenly die. It may be tempting, especially when we’re young and healthy, to think that life insurance isn’t needed but if you have a spouse or kids that are dependant financially on you, then it is irresponsible not to make sure that they would be okay in the event of your death. Typically the monthly payments aren’t very big and the payment could make a big difference to the people you love.