Tips for buying life insurance
Written on 5 January 2016
The start of a new year is a perfect time to review your finances and make sure you’ve got everything you need in place. One important step is to make sure your family would be protected financially if you died.
Here are our top 10 tips to help you choose the right life insurance for your needs.
Check if you need life insurance
The aim of life insurance is to provide your family or other dependants who rely on you financially with a lump sum or income if you die.
If you’re single with no children and no-one else relies on you financially, you may not need any life cover.
Remember, even if you don’t have any income your death could affect your family’s finances. For example, your partner may have to cut back on his or her working hours to look after your children or pay for childcare.
Check what cover you already have
If you’re employed you may have some life insurance at work. Many employers offer what’s called death-in-service which can provide your family or anyone else you nominate with a tax-free lump sum (typically four times your annual salary) if you die.
You may also have taken out life insurance already and forgotten about it such as when you took out a mortgage.
Work out how much you need
There isn’t a magic formula for working this out. The amount you’ll need will depend on all sorts of things including how much life insurance you’ve already got (you may have life insurance through work), what you want the insurance to cover and the financial situation of your family and dependants.
For help working out how much you might need and for how long try our interactive tool.
Choose a lump sum or an income
Decide if you want to provide your family with a lump sum or if an income for a set period of time (such as while your children are growing up) might be more useful. There’s nothing to stop you having more than one life insurance policy – one that provides a lump sum and one that provides an income.
Our guide, Understanding different types of life insurance, has more information.
Choose single or joint cover
If both you and your partner want life cover decide if you want a joint policy (which pays out once – either on the first or second death) or if you can afford a little more to buy separate policies for twice as much cover. Separate policies also give you more flexibility as you can insure for different amounts and lengths of time.
Check if the payments are guaranteed or reviewable
Some policies have premiums that are guaranteed which means they won’t change over time while others have reviewable premiums which means they may increase. Be careful with reviewable premiums – they may be cheaper to start with but could become unaffordable later.
Choose fixed or inflation-linked payments
Decide if you want the payout to be inflation-linked. For example, if you’re looking to maintain your family’s standard of living if you die, you may well want any income you leave them to rise by the rate of inflation each year.
Life insurance is relatively inexpensive but it’s still a good idea to shop around. And remember if you’re looking for life insurance to cover your mortgage, you don’t have to get it from your mortgage provider.
Choose the right cover for your mortgage
Decreasing term insurance is specifically designed for repayment mortgages as the amount it pays out reduces each year in line with the amount you owe on your mortgage.
If you have an interest-only mortgage, you’ll need level term insurance which pays out a fixed sum to cover your mortgage.
Only buy cover for the period you need it
If you only need life insurance while your children are growing up opt for term insurance (which lasts for a set period and only pays out if you die during this time) rather than whole-of-life insurance (which pays out whenever you die).