By Sophia Bhatti, Partner at Hoxton Capital Management.
Life insurance provides a security cover to beneficiaries on the passing of the insured. Depending on the type of life insurance, it is usually paid out after death or after a certain amount of time passes by. As part of financial planning, it is often the case that we plan not only for ourselves but our families and loved ones. As a result, one thought weaves its way into this: how can I ensure that my family will be financially secure even after I’m gone? The foremost answer that pops into our heads is life insurance.
TYPES OF LIFE INSURANCE
A slew of insurance coverages is available in the UK. Apart from the type of cover, you must also consider the amount of the cover depending on your family circumstances and priorities. Here’s a brief roundup:
TERM LIFE INSURANCE
This is a cover synced to a particular period of time or ‘term’. It is often taken out to cover a loan or continuous financial obligation. There are three further subtypes.
- Decreasing Term Life Cover – As the name suggests, the amount to be paid out by the insurer decreases over time. This requires that the loan amount also lessens over time.
- Level Term Life Cover – In this, the loan amount remains the same regardless of when it is claimed. One should note that this does not account for inflation.
- Increasing Term Life Cover – The insurer pays out more as the time passes for families who may need more help as the time goes by.
WHOLE LIFE INSURANCE
This covers the entirety of one’s life and is paid out after death.
JOIN LIFE INSURANCE
This is one policy that covers both you and your partner.
OVER 50S LIFE COVER
These are usually whole life policies for those above the age of 50.
CRITICAL ILLNESS COVER
TERMINAL ILLNESS COVER
If you are diagnosed with a terminal illness, which causes death within a specific period of time, the amount is paid out early.
This is added to your life insurance to cover the accidental death of a child or a critical illness. This is available at an extra cost.
WHAT MAKES LIFE INSURANCE IMPORTANT
Now that we understand a little better how life insurance and its different types work, you can choose the one that works best for your finances and life in general. At the same time, you should also be clear on why you should get a cover in the first place.
- PROTECT YOUR FAMILY
This is the most obvious reason. As we discussed before, you want your family to be secure in the eventuality that you cannot financially support them. It may happen that your savings are not enough to tide your family for longer than a short duration. It safeguards against a sudden loss.
- SUPPORT IN CASE OF LOST INCOME
If the primary or sole breadwinner of a family passes away, the financial ramifications can be monumentous. The payout from life insurance can help cover monthly expenses on utilities, food, clothing, housing, etc.
- PAY OFF DEBT
Debts aren’t written off after an individual’s death. A sudden passing may push the family to sell assets or use up their savings to pay off debts. Life insurance can help in this case. It can be used to settle debts without interfering with day-to-day expenses.
- COVER FUNERAL EXPENSES
Funerals are rarely cheap and never easy to deal with. Apart from the grief and loss of a person that the family has to deal with, worrying about the expenditure on a funeral only worsens the situation. One can either divert some amount to the funeral home taking care of the arrangements or pay by themself for the time being and get reimbursed by the insurance payout later on.
- FUTURE EXPENSES
Let’s say your child wants to go to a college, there is going to be a wedding in the family, or other such major expenditures. These are not immediate expenses to be taken care of; however, they still require some planning. The money from life insurance can help cover some of these costs.
- PROTECT YOUR BUSINESS
If you own and run a company, an unexpected passing can have serious ramifications on employees as well. If your family is well taken care of, the insurance money can also go to help tide the business over. After all, the business also brings in income for your family.
Cast all these reasons and more aside and just think of the one reason you need to get life insurance, that is, ease your family’s financial worries. Not to mention the financial discipline it evokes with periodic premiums that have to be paid. Selecting the right insurance for you is a balance between your budget and needs. As time passes, if your situation changes you will also have to re-evaluate your insurance requirements. It is neither too early nor too late to make sure that your family and you are appropriately covered.