Protecting yourself financially against a death
Last updated on 11 May 2015
Financially protecting yourself and your loved ones against a death in the family means there is one less thing to worry about if the worst should happen.
Why you might want protection
Nobody likes to think about what would happen if they or a loved one died but being financially prepared can help to ease the burden for you and your family if the worst should happen.
There are various types of life insurance which pay out a lump sum or income on death. Different products offer different types of cover so you need to check which ones might be best for your needs.
What cover you might need
If you're in paid work, you might want insurance to replace your income if you die. If you are not in paid work but look after your children or an elderly relative, you might want insurance so there is money to pay for someone else to look after them if you die.
You can buy life insurance which pays out a lump sum on death to cover specific expenses or an Inheritance Tax bill. Other policies can be used to provide an income (known as family income benefit). There are also life insurance policies specifically designed to pay off a repayment mortgage (the type where the amount you owe decreases each year as you gradually repay the capital). These are called mortgage decreasing term assurance policies and pay off your outstanding mortgage if you die.
Family income benefit
You can take out life insurance to provide an income for your family if you die. This is known as family income benefit.
You might want just one lot of life cover or you might want two or more policies to cover different needs such as a lump sum for immediate use to pay off debts and funeral expenses and an income for future needs.
How much cover?
Working out how much you might need to pay off debts (such as your mortgage, loans or credit cards) is straightforward. But working out how much you might need to live on can be more difficult. One way to do this is to draw up a budget of how your household's income and spending might change if this happened.
You also need to consider how long this money might be needed. For example, if you have young children it could be until they are old enough to support themselves. And don't forget that prices rise over time so you'll need to factor this in when choosing the level of cover you want. Alternatively, choose a policy with an 'increasing cover option' so the lump sum your policy pays out increases each year in line with inflation or by a fixed amount, such as 3%.
You could either take out life insurance which pays the required level of income for this period or work out how large a lump sum would be needed to provide this income.
You may already have some life cover through your employer which can be taken into consideration. You may also have investments, savings or pensions which would pass on to your family if you died. And there are also state benefits you may be entitled to if your spouse or civil partner dies.
The cost of insurance depends on the type of policy, the amount of cover and a whole host of other factors such as your age, job, health and lifestyle (smokers pay more than non-smokers).
Cover varies, so the cheapest policy is not necessarily the best. Check for exclusions when a policy will not pay out. It's also often worth paying a little more for waiver of premium so that your premiums are paid for you if you are unable to work due to illness.