Life insurance buying guide
Buying life insurance can seem like a daunting task and it forces you to consider circumstances which, at this moment in time, you probably don’t want to think about – but that’s no reason to push it to one side.
With so many levels of cover to choose from, you may have a few questions like:
- What is life insurance?
- How much does life cover cost?
- Why do I need it?
- How do I know what cover is best for me?
At Bobatoo, we understand that the complex nature of life insurance can often put people off. That’s why we are here to answer these questions and want to try our best to explain the ins and outs to you, without the technical jargon.
When taking out a life insurance policy, you want the cover to provide your loved ones with sufficient financial protection in the event of your death.
However, before taking out life cover, it is crucial that you do your homework to make sure you’re getting not only the best life cover, but the best life cover that is affordable for you.
Do I need life insurance?
Before taking out a life insurance policy, you need to work out what kind of cover you need. Below, we have listed some of the main reasons that people may take out life cover policies:
- Becoming a parent – Many people take out life insurance after becoming a parent. In the event of death, the payout could provide for their children.
- Buying a property – A life insurance payout would likely help a spouse, partner or another family member to pay off the mortgage in the event of your death. This is particularly important if they rely on your regular income to meet payments.
- Inheritance – Some people also look at life insurance as an inheritance option, to leave for relatives after they die.
- Funeral costs – Funerals aren’t cheap, so many people take out life insurance to help cover the costs of their loved one’s final goodbye.
Whatever your reason may be, having the right type of life insurance in place can give you peace of mind in the knowledge that your loved ones will be financially covered when you pass away, leaving them to grieve for their loss in peace.
How much life insurance do I need?
As a general rule with all protection insurance policies, the more you wish to protect, the more your premiums will cost. The level of cover required will usually be closely linked to your reason for taking out life insurance in the first place, for example:
- Life insurance for a mortgage – If you are choosing your policy to cover your mortgage, you should make sure that your payout matches the amount left to pay off.
- Life insurance for taking care of dependants – If you want a policy that will look after your dependants (such as children, parents or a spouse) for a number of years, you should base this on your current expenditure, what you can afford in the present day, and then think about any potential future costs, ie. University fees, child care or support for elderly relatives.
- Life insurance for inheritance – If you are over 50 and considering taking out a policy as a form of inheritance, or to help your family with funeral expenses, you should choose your cover based on how much you’d like to leave to your loved ones as well as how much you’d like to contribute towards a funeral.
Did you know? The average cost of a funeral in the UK stands at around £4,400 (and that’s without administrative fees, flowers, catering etc.)
How long should I get life insurance for?
When taking out life cover, you have a couple of options. You can get a policy for a fixed period of time, or for the rest of your life.
These policies include term insurance (level term and decreasing term) and whole of life insurance.
Term life insurance
Term insurance is most commonly used to:
Pay off a mortgage
If you know that you have 12 years remaining on your repayment mortgage, you can take out a decreasing term life insurance policy for the same amount of time, which reduces your payout (as well as your monthly premiums) as you continue to pay more money off your mortgage.
Remember, though, this will only work for you if you have a repayment mortgage and not an interest-only one. If you have an interest-only mortgage, the amount required to pay-off that mortgage will remain the same.
If you have young children who you’d like to financially protect for a specific amount of time, a popular option is to take out a level term life insurance policy, which can be set to finish when they reach a certain age (usually either 18 or 21).
Take into consideration how much financial aid you would provide if you were still around. Would you help to buy their first car? Contribute towards their living costs while at University? Pay the deposit for their first home?
You should even take into consideration things like birthday and Christmas presents which, even after you’re gone, you can still help to pay for.
Don’t forget that term insurance has a start and an end date, so the policy may (hopefully) expire before your death - if you pass away after the end date with no other insurance in place, you are not eligible for a payout.
READ MORE: Level term vs decreasing term life insurance
Whole of life assurance
Whole of life (WoL) cover is typically referred to as ‘assurance’ rather than ‘insurance'. This is because insurance is typically used to provide protection in the event that something goes wrong, whereas assurance means that you are guaranteed cover, so your loved ones will definitely receive a payout, no matter when you pass away.
If you have an idea in your mind of how much money you’d like to leave to your family members then whole of life cover could be for you.
Whole of life insurance can be significantly more expensive than term life cover, mainly because your loved ones are guaranteed a payout. Of course, the earlier you take out a whole of life cover policy, the cheaper it will be. This is because generally, the younger you are, the healthier you are, so you don't pose as high a risk to insurers compared to someone who is older and smokes, for example.
There are also other factors which can determine the cost of your life insurance; read our guide for more information: How much does life insurance cost?
It is important to consider your financial commitments at present when considering which length of policy to take out, as well as how much cover your family would need in the event of your death. It is always best to speak to an experienced life insurance advisor to make sure you're getting the best cover and that you fully understand how your policy works.
You can find out more about our whole of life insurance here.
Should I always pay the same premium?
Generally, people tend to pay the same amount every month for life insurance. However, this depends entirely on the type of policy you have.
As touched on earlier in this guide, a decreasing term life insurance will fall in value as you continue to pay off your repayment mortgage. Whether you were to pass away with £5,000 or £150,000 remaining to pay, your policy is designed to cover this amount.
Over the course of time, premiums could also change in line with inflation, depending on your policy - be sure to check this information with your insurer when applying for cover.
Should my life insurance policy change with inflation?
Inflation might only seem small year-on-year, but when you consider that the average cost of a house in London rose by more than £460,000 in the 40 years between 1979 and 2019, it is certainly something which you might want to take into consideration when taking out life insurance.
This is why some people decide to take out what is known as index-linked life insurance. This type of policy changes its payout alongside the consumer price index (CPI) to ensure that it remains an accurate reflection of the modern world.
One thing to keep in mind is that when index-linking your payout, your monthly premiums could rise as well. You’ll still be paying a fair amount in reflection of what you or your loved ones would be given at the end of your cover, but keep this in mind if you’re looking for life insurance on a shoestring budget and always be sure to ask about this when getting a policy.
Joint life insurance: Should I share a life policy with my spouse?
Just because you are the joint owner of a property, or have other shared debts, you are not required to share a life policy with your spouse.
If you and your spouse were to take out separate life insurance policies, there would be two separate payments paid out (upon the death of each individual), giving more protection to dependents in the long run.
Taking out 2 separate life insurance policies is certainly an option, but almost always works out more expensive than taking out a joint life insurance plan.
If there was a joint policy in place, it would pay out on the first death. After this, the policy would end and it would then be up to the remaining party to secure a new life insurance policy if necessary.
REMEMBER: Even if one person stays home to cook, clean and look after children, their contributions should not go unnoticed when taking out life cover. Consider how much value they bring to your day-to-day life in relation to childcare costs and other expenses.
READ MORE: Joint life insurance
How much is life insurance?
As with any type of insurance policy, the more cover you want, the higher the cost of your premiums will be. However, this is not the only factor taken into consideration by insurers when providing you with a life insurance quote.
- Your age – Older people typically pay more for life insurance, as they tend to have more health-related risks.
- Your health – Those with a clean medical record find it far easier to find cheap life insurance than those who have suffered with a serious illness.
- Your lifestyle – Smoking habits will increase premiums massively. Insurers will also consider your weight and how regularly you exercise.
- Your family medical history – If there is a history of medical conditions in your family which you might’ve inherited, such as cancer or diabetes, your premiums will be higher.
The best way to reduce your life insurance premiums is to take action. Doing something as simple as increasing the amount of exercise you do, quitting smoking or losing weight could soon see your premiums fall – plus, you’ll feel all the better for it.
Putting life insurance in trust – what does it mean?
When you die, your entire estate (everything you own) valued above a collective £325,000 will be subject to a 40% inheritance tax. This includes everything from your favourite necklace to your home, but what many people don’t realise is that it also includes your life insurance payout.
Depending on your level of cover, having your life insurance policy included as part of your estate could significantly decrease the inheritance received by your loved ones – but there is one, completely legal, way to avoid it.
Writing your life insurance policy in trust will mean that the cover is separate to the rest of your assets, such as savings, investments and any property. This will mean that payments from the policy are not included in your estate for inheritance tax purposes*.
Writing your life insurance in trust also means that you get greater control over your money and how it is spent following your death.
*Whilst this is the current legal position, it could change, so always seek advice.
READ MORE: How to avoid inheritance tax
Compare life insurance with Bobatoo
With so many companies offering cheap life insurance deals, it is hard to know where to start. A great starting point is to go online and compare prices from as many providers as possible.
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