The loss of a family member is a difficult and emotional time. But having a life insurance policy in place can give you and your family peace of mind that they will not be hit hard financially should the unthinkable happen. Perhaps the most popular motive for taking out life insurance is that very reason – to ensure the financial protection of your loved ones, especially if you have children or other dependents. Shockingly, one in four UK breadwinners do not have life insurance in place, leaving a £263 billion gap in protection for those families .
Life insurance can help to replace lost income upon your death, assist in paying off any debts, including the mortgage, or can be used to cover day-to-day household expenses. In some cases, it may be used to help shape a person’s future, allowing them to buy a home or pay for their education.
There are many different types of life insurances, each one coming with its own set of benefits and disadvantages. Getting a good understanding of life insurance can allow you to properly plan for your family’s financial future should you no longer be around to do so yourself. Anyone of any age can buy life insurance and considering your family’s needs – and what you hope the life insurance money to be used for – will allow you to select the most appropriate type for you.
One type of life insurance which could be beneficial for your family is term life insurance. Here we look at the benefits and protection such life insurance can provide for your loved ones.
What is term life insurance?
Life term insurance provides you with life cover for a fixed period of time. This means that if you die within the stipulated period of time, your loved ones will receive a lump sum payout. The fixed term is usually between five and 25 years although longer time frames are available. If you live beyond the policy term, there will be no cash payment and you will not be compensated for the premiums you have paid out.
What are the benefits of term life insurance for my family?
There are several advantages of a term life insurance policy which make it a great option for families, particularly young families who may often be on a more restricted budget.
Term life insurance is one of the more affordable life insurance policies because it covers a predetermined period of time. This affordability makes it a great option for families because it provides good, solid coverage while being far more budget friendly than other options such as whole life insurance.
One of the key benefits of a term life insurance policy is that it is completely versatile. Your family can use the money in whichever way they choose. Among the most common uses for the lump sum payout are:
To cover funeral expenses, which currently stand at an average of £4,100 in the UK 
To replace the income of the deceased
To repay any outstanding debts
To cover a mortgage
To pay for education fees
A term life insurance policy offers great flexibility because you can choose how long you want it to run for. This means you can select a shorter length of time to cover a shorter-term expense you may currently have. This flexibility can make it a great choice for people with young families. Family life constantly changes and evolves as your children get older. Term life insurance could help you to cover yourself for a shorter timeframe while your children are more financially dependent on you, or if you are covering a shorter-term expense such as school or university tuition fees. This means you can have greater coverage while your children are more financially dependent, and then lower it when they become more financially independent.
Simple to understand
Let’s face it, insurance life policies can sometimes be a complex undertaking. Term life insurance is fairly simple to understand. As long as you keep up your monthly payments, you will have life insurance for the term stated under your policy.
What protection does it give my family?
There are three main types of term life insurance, all of which offer different protection to your family in the event of your death.
– Level term life insurance
In this type of term life insurance, premiums and cover remain the same throughout the entire term of the policy. This can be the right option for many families because it means you know for certain what the payout amount would be, while being able to plan and budget for a set premium each month. It can bring peace of mind and comfort to know that daily living costs would still be met once you are gone. There is flexibility too as to what it could cover, such as the mortgage, household expenses or a child’s education. This is a particularly good option for people who do not have much debt and want to leave their loved ones something when they die.
The main drawback of level term life insurance is that it does not move with inflation and, therefore, may not be able to keep pace with rising living costs. Also, the money is paid to a nominated loved one and it is up to them to decide what it will be spent on.
-Increasing term life insurance
Under this type of term life insurance, the amount of cover increases each year by a fixed amount for the term of the policy. This is a great way to protect the value of your policy from inflation and rising costs of living. An increasing term life insurance policy takes inflation into account and premiums will rise during the term, usually annually. This type of life insurance is good for those who want to leave a lump sum which is protected from inflation but are happy to pay an adjusted premium each year. This type of insurance may also be considered by someone who could be liable for a large inheritance tax bill as it may help to offset it.
-Decreasing term life insurance
This form of life insurance is designed to protect your mortgage repayments or similar debts. Under this type of policy, your life insurance coverage will be for a fixed term but the amount you would get decreases over that period. This is usually set to cover a remaining mortgage, so if you do die within the period, the resulting payout would be enough to cover the sum remaining at the time of your passing.
There are several reasons why this may be the best option for your family. It means you can get peace of mind that the outstanding mortgage would be paid upon your death, meaning your family would not be hit by the stress and worry of keeping up repayments. This type of life insurance is a great option for those starting a family or with young families. This is because as your children grow up, the size of payout needed would reduce because they are on their way to becoming more financially self-sufficient. It is also one of the most affordable options and usually offers lower premiums than level term plans.
Life insurance decreasing term policies are not suitable for those with an interest-only mortgage.
What are the disadvantages of a term life insurance policy?
Life insurance buyers need to understand the disadvantages of certain types of life insurance policies, so they can evaluate them properly and assess if they really are right for them. Disadvantages of a term life insurance policy include: –
– If you do not die during the life insurance term, then your life insurance policy ends and you are not compensated for your premium payments. There will be options to extend or switch but, as you will be older than you were when you first took it out, premiums are also likely to be higher. It is estimated just 1% of term life insurance policies result in a claim. Life expectancy is constantly growing in the UK too, standing now at 79 for males and 82.9 for females .
– Your circumstances could change dramatically during the course of your term life insurance policy. If you do survive that period, you may find getting life insurance afterwards much harder. Your age or a change in your health may mean the cost of your insurance policy is much higher, especially if you first took it out in your 20s or 30s. This is not a problem associated with whole life insurance policies.
– Some term life insurances will not provide you with cash value. This means it will be a set sum regardless of how much you have paid and how long you have paid premiums for. It will not rise in line with inflation or any other economic factors.
What alternatives are there to term life insurance?
There are many different life insurances that you can choose from. The main alternative to term life insurance is whole of life insurance. As the name would suggest, whole of life insurance is an insurance for life. It is usually more expensive than term life insurance as a playout is guaranteed. Provided that you keep up your monthly payments, your nominated loved ones are guaranteed payment upon your death. This means you can get peace of mind that your loved ones will be financially secure no matter when you pass away. Whole life insurance can often be a better option for those who want to provide money for an inheritance or to cover funeral costs.
How do I know if term life insurance is right for me?
Finding the right life insurance to provide optimum protection for your family depends on your personal circumstances and most importantly, what you hope your life insurance pay-out will cover. As a general rule, term life insurance is often considered a good option for young families because it is more affordable, offers greater flexibility and is more versatile. It allows you to provide cover for shorter-term expenses that you may face when raising a young family and allows you to reduce that cover as children grow and become less financially dependent.
By providing a fixed pay-out during a fixed term, level term life insurance allows you to leave money for your family and loved ones even if you have not had time to build up much wealth. Under a level term insurance policy, premiums any payouts are guaranteed, allowing you to budget. The peace of mind and comfort that comes with knowing your family will be looked after should you pass away cannot be overstated. Increasing term life insurance is perfect for those conscious of the rising cost of living and impact of inflation but does bring with it increases in the premium year on year.
Finally, decreasing term life insurance is appealing for those who wish for their mortgage to be paid off upon their death and that is exactly what it is designed for.
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