If disaster strikes, life insurance can pay out when your family needs it most
In the fourth of our series on dealing with finances after a loved one dies, Tony Hazell looks at life cover - one of the best protection policies you can buy.
If you don't think life insurance is important, then consider this: if you filled Wembley Stadium with 90,000 men aged 25 to 34, by the end of this year, 74 of them would be likely to die.
If the crowd was aged 45 to 54, 322 would be likely to die.
What would happen to your family if you were one of the unlucky ones?
Would they have enough income to live on without you?
Why you need life insurance
Life insurance may not be a subject to set the heart racing, but it does have plenty going for it.
It's cheap and it may just be the most important financial product you ever buy.
In 2013, more than 25,000 people claimed more than £1.3 billion on the most basic form of life insurance, according to trade body the Association of British Insurers.
The average payout was £51,500 and most people will have been paying just a few pounds a month in premiums.
Add in claims on more complex policies, such as those that pay out when someone is critically or terminally ill, and the figures leap to more than 86,000 policies paying out almost £3 billion.
How much do you need and how is it paid out?
When buying life insurance, you need to consider not just how much cover you need, but under what circumstances you want it to pay out. Also, you need to think about whether you want money paid as a lump sum or gradually.
You can buy life insurance by phone, from comparison sites on the internet or directly from a company. But you can also go to an independent financial adviser, who can calculate how much your family is likely to need.
Calculating how much cover you need is difficult. You'll want to repay the mortgage, but what about school or university fees?
Even if the surviving spouse works, they may have to scale down their job or pay for child care.
As a guide, a £200,000 lump sum would give you £10,000 a year income for just under 30 years if you earn a constant 3 per centon it.
The most basic form is term insurance. You take out a set amount of insurance and if you die before a certain date, the policy should pay up. If you survive, you get nothing.
A 30-year-old could get a £100,000 policy for £6 to £7 a month through Legal & General, Aviva and LV=, among others. Boost the cover to £200,000 and you're looking at between £8.50 and £12 per month.
There's also decreasing term insurance, where cover reduces over time. This is a little cheaper and can be useful for covering a mortgage or for complex inheritance tax planning.
You can get a regular income paid out
If you don't want to worry about investing money, Family Income Benefit (FIB) pays a regular income until a specified date. For instance, it could be set up to pay out until the youngest child is 21.
This can be bought with inflation protection. For benefits of £2,000 a month on a 30-year policy, a 30-year-old might expect to pay between £15 and £20 a month.
The disadvantage of FIB is that if the person insured dies one month before the termination date you will get only one month's payment, while with term policies you would have got a large lump sum.
Joint vs separate policies
Consider whether to have a joint policy or for each of you to have your own life cover.
The key thing for young families is to make sure the policy will pay out when the first person dies.
Some policies pay on second death, but these are primarily meant for inheritance tax planning.
Joint policies can work out cheaper than two separate ones. For example, joint cover on a £200,000, 30-year level term policy would cost £15 to £18 a month with the cheapest insurers. The FIB policies could cost between £23 and £32 a month for £2,000 of joint life cover.
However, if you both die, your children would get only one payment; with separate policies, they would get two.
The extras you need to consider
There are also bells and whistles on life insurance, some of which can be very useful.
Most will pay out if you develop a terminal illness. This can help if the healthy partner is forced to cut down on work or give up entirely.
Some policies will allow you to add on cover in case you develop a critical (but not necessarily life-ending) illness, such as a heart attack or cancer.
Adding on £60,000 of critical illness cover to a 30-year policy is likely to cost a 30-year-old between £10 and £20 a month extra.
However, the industry has a poorer record on paying out on these, with one in 12 claims turned down.
You may be offered index-linked life insurance, where your monthly premiums and the insurance payout rise with inflation.
Then there is waiver of premium. This costs extra, but it will make sure your premiums are paid if you lose your job or can't work for other reasons, but you'll usually have to wait 26 weeks before it cuts in.
Watch out for premiums going up and tell the truth
Be wary about any clause that allows the insurer to review (ie, raise) the premiums. A clue will be if it seems very cheap.
Whole of life cover tends to be offered to older people worried about inheritance tax or funeral costs, but it can still be offered to the young.
Instead of running for a specified period, it will pay out whenever you die.
But beware — premiums may be reviewed, usually every ten years.
It is important to be honest about your health and lifestyle when taking out life insurance. Lying will keep the premiums lower, but could leave your spouse without an insurance payout.