It's a fact. Before you do, you need to figure out whether you need life insurance. Or, you could do nothing. You definitely won't suffer either way - but your family might...
If you're anything like me, you'll be starting 2010 determined to save a bit more cash every month. Perhaps you'll be looking through your bank statement, trying to see which particular expenses you can do without.
And, more than likely, your eye might rest - just for a moment - on your life insurance. It might not happen, right? Hey, plenty of people don't have life insurance, and they get by fine.
Maybe you are one of those people that don't need life insurance at all. But if you aren't - and that probably accounts most of us - then doing without life insurance is an absolutely crazy and irresponsible risk.
Who needs life insurance?
First, let's be clear about who does and who doesn't need life insurance.
My lovemoney.com colleague Neil Faulkner came up with a simple question to ask yourself in order to determine if you need life insurance, and it works really well: If I die, will my family or loved ones miss my income or financial support?
This pretty much sums up the life insurance debate for me. If you live on your own, and have nobody who would miss out financially should you pass away, then life insurance is pretty obsolete.
However, if you do - whether that means children, or a joint mortgage with someone - then life insurance is not just a good thing to have, it's an absolute necessity. Without that cover, should the worst happen, you are putting your loved ones at unnecessary financial risk.
Quite simply, you NEED life insurance!
What do I need?
Once you're clear that you need life insurance, it's time to get to the nitty gritty of what type you need - and just how much insurance.
First, let's take a look at the main different forms of life insurance there are:
Level term assurance
As the name suggests, this provides 'level' cover - in other words, your premiums and the amount you are covered for remain the same over time. So whether you die in the first year of your policy, or the last, your beneficiaries will get exactly the same payout.
This means that if your family do make a claim, there's a good chance they will end up with a surplus of cash after the mortgage is paid off. Your family may need this money to cover other debts, household running costs or childcare. Remember, when you die, the income you bring in to the household dies with you.
Decreasing term assurance
This is the main alternative to level term assurance. Over time, the amount you are covered for decreases. It's a good option for mortgage borrowers, who only want to pay for enough cover to pay off their mortgage.
The thinking is pretty simple. If you die 20 years into your policy - and 20 years into your mortgage - your family won't need such as much cover to pay off the mortgage, as they would if you died five years into the policy and the mortgage.
Remember, if you don't have enough life insurance cover to pay off your mortgage when you die, your family will have to meet the cost of the monthly repayments once you're gone, without you. If they can't afford this, they will be turfed out of their home. That's why life insurance is so important for mortgage borrowers.
Because the amount of cover you receive decreases every month, the premiums for this type of cover are usually a lot less than the premiums on level term assurance policies. So it's a popular, cheap option for mortgage borrowers.
Increasing term assurance
Can you guess how this one works?
It might seem a little counterintuitive as a concept, but having a form of life insurance where the cover (and therefore the premiums) are increased periodically over time makes sense according to life insurance broker Lifesearch, which argues people may require additional cover as time goes on due to increases in their income and inflation.
You can choose whether the cover is increased in line with inflation or by a fixed percentage each year, all without the need for a medical assessment.
Alternatively - and this may be cheaper - you could go for a level or decreasing term assurance policy with Guaranteed Insurability Options. This gives you the right to increase your cover after a key event in your life, such as when you get married or have children, so that you have more cover. Again, you can do this without having to undergo a new medical assessment by your insurance company when you need more cover.
This is particularly relevant if you haven't yet done any of these things, and would prefer not to have to undergo a new medical assessment when you do. After all, your health may have deteriorated at this point and you may find it difficult and expensive to get a new policy.
For a full explanation of guaranteed insurability options, be sure to have a read of how to keep the costs down for extra life cover.
Family Income Benefit
A nice alternative option this - instead of paying out as a lump sum, a Family Income Benefit policy will pay out your cover as a tax-free annual income to your loved ones.
You decide what level of annual income you want to provide your family with and the period you want cover for. For example, you may want to ensure your family receive a pay-out that is equivalent to your income every year until your youngest child is 18.
In this case, the earlier you die, the bigger the total payout your family receives.
Adding on critical illness
You'll also have the option of adding critical illness. Very simply, this will pay out the specified amount if you are diagnosed with one of the illnesses or diseases named on the policy. Read the small print carefully as there are often lots of exclusions on these policies.
How much do I need?
Just as important as what type of cover you go for is how much cover you want. You don't want to get this decision wrong, as under-insuring your life will leave your family with a shortfall if you die.
Of course, it's a fairly simple calculation if you have a mortgage - your cover needs to at least match the outstanding sum owed to your lender. However, if you don't have a mortgage, the cover you need will vary significantly, depending on how much money or income you want your family to have when you die.
Thankfully lovemoney.com have our very own cover calculator to help you get that figure right.
Be sure to shop around!
Once you know what type of cover you want, and exactly how much, it's just as important to properly shop around for the best deal, as there can be significant variances in just how much it will set you back on your premiums each month.
However, lovemoney.com operates a cracking life insurance service which does all the hard work for you. If you're on the hunt for a decent deal on life insurance, you'd be mad not to give it a go.
We also have a fantastic Get the right type of life insurance goal which provides all sorts of hints and tips to help you get exactly the right policy for you.
And finally, if you have any life insurance-based questions you need help with why not see if you fellow lovemoney.com users can shed some light on the issue in our Q&A section.
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