Life assurance policies are payment protection policies designed to protect your dependents financially in the event of your death and there are several different types.
Do I Need Life Assurance?
Not everybody needs life assurance but if you have a family and a mortgage you should definitely take out a life assurance policy. They are essential to have in case you die whilst you still have dependents. This may not necessarily be children although that is one of the primary reasons people take out cover. If you are married or have a partner with whom you live, they might also need to be protected if you die as they may not be in a position to repay the mortgage on their own and this could result in them having to sell their home.
Some people tend to overlook life assurance because they believe they are covered by a work policy known as ‘death in service’. This means that if they were to die whilst working for a company, their employer would pay out a lump sum to their dependents. However, these policies usually only cover you for a certain fixed amount and only usually run for a few years which means that, if you have younger children, your family would still suffer once the term of the policy expires so it’s still important to take out proper life assurance coverage too.
What are the Different Types of Life Assurance Cover?
The most basic form of life assurance is called ‘term assurance’. It has no investment value but simply pays out a lump sum to your dependents upon your death. The length of the term of the policy can vary but people would often obtain coverage to match the date at which they would expect their mortgage to be paid off so that, in the event of death, their mortgage would then be fully paid off by the life assurance company.
This form of life assurance is the cheapest as there is no payout if you survive the term of the policy so, in effect; the company might not have to pay anything out to you or your dependents at all if you’re still living at the end date of the policy. Therefore, the cheaper cost of these kinds of premiums can reflect that. There are different types of cover however. For example, if you have an endowment mortgage you’d be better off choosing level term cover whereas with a repayment mortgage it would be better if you have a decreasing term policy where the sum insured gradually reduces in line with what you have left to pay on your mortgage.
Renewable term assurance gives you the added flexibility of extending your cover once the original term of the cover reaches its expiry date which can benefit those who think that it may end up taking longer to repay their mortgage than they’d originally thought.
You can also consider an index linked term policy which protects you from the effects of any inflation costs or family income assurance which pays out a regular income which is tax free to your dependents in the event of your death.
Many people opt for ‘whole of life’ (WOL) policies which pay out no matter when you die, even if your mortgage is fully paid up and, because they are different from term assurance policies in that they are considered an investment product, it can well mean that your dependents could end up receiving more than the sum that was initially guaranteed when you die. Other policies include critical illness cover and income protection cover so that if you were unable to ever return to work, you would receive a lump sum even prior to your death.
Therefore, life assurance is vital if you want to protect your family in the event of your death in order that they can manage financially after you’ve gone. You should seek advice on what would be the most appropriate policy for you and shop around for the cheapest deals remembering to compare like-for-like policies as the cover can differ tremendously.