How long does my life insurance need to last?
5 min read
The length of your insurance policy will be influenced by the reasons you need cover.
Life insurance pays out a set amount of money when you die. However, you can choose whether you want a policy that will pay out upon death, or one that will pay out if you die before a certain date.
Life insurance becomes more expensive as you get become older. This is because you pose a greater risk to the insurer. It therefore pays to consider how much money, and therefore which policy, might be needed when.
'Whole of life' cover that lasts as long as you do
A ‘whole of life’ policy provides the simplicity and peace of mind that no matter when you die, provided you keep paying the premiums, your nearest and dearest will benefit.
A whole of life policy can therefore be suitable for covering costs that won’t disappear in future, such as funeral expenses or an inheritance tax bill.
However, because a whole of life policy guarantees a payout, it is likely to cost more than a ‘term’ insurance policy, which only runs for a set amount of time.
What is term life insurance?
If you want to keep costs more manageable, consider when any payout might be needed. A ‘term’ insurance policy, which runs for a fixed amount of time, could be more suitable for costs that won’t last for ever.
So, if for example you are looking for a life insurance policy to cover your mortgage if you are no longer around, the policy will only be needed until your mortgage is paid off. You could therefore set the policy to last as long as your mortgage term.
With a repayment mortgage, where your balance gradually goes down, you might consider ‘decreasing term’ insurance. Decreasing term insurance costs less, because the payout falls during the term, along with your shrinking mortgage balance.
Alternatively, if the life insurance policy cover is designed to support your partner, kids or anyone else who depends on you financially, it might only be needed until they have their own income. You might therefore choose a policy that lasts until your children have finished education and can earn their own living, or that stops when your partner’s pension starts.
'Over 50s' cover for later life
As you get older, your financial circumstances may change. Your children may have flown the nest and can financially support themselves. You may become more interested in cover that could, for example, help with clearing debts, topping up living costs or paying for your funeral.
Be aware that, the costs of traditional ‘whole of life’ or ‘term’ insurance creep up with age, and may become more difficult to arrange, especially if you have health issues.
Instead, you might consider an ‘over 50s’ policy, which will pay out a lump sum when you die.
Over 50s policies have the advantage that you don’t have to supply the insurer with information on health conditions, or risk being rejected for cover.
Typically, the cover continues as long as you keep paying the premiums, although with some policies you don’t need to keep paying after the age of 90.
However, if you are fortunate enough to live for many more years, there is a risk that the payout amount cash paid out may be worth less than all the premiums you paid in.
By thinking about when money might be most needed, you can work out how long your life insurance needs to last, and find the right type of cover to suit your circumstances.
Faith Archer is a freelance personal finance journalist and money blogger at Much More With Less. Previously Deputy Personal Finance Editor at The Daily Telegraph. She has also written for publications including The Sunday Times, The Financial Times, Mirror Online and the Money Advice Service.
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