Should I buy family life insurance?

May 16, 2013 at 10:24 pm Leave a comment

life-insurance-for-childrenShould I buy family life insurance?

The reason for buying family life insurance, which can also be known as life assurance, is quite simple. In the unexpected event of your death – and subsequently, your income – your loved ones will receive a lump sum payment (or alternatively a series of smaller payments or monthly income).

This money can be used to cover outstanding financial commitments such as mortgage repayments, credit cards or loans; ongoing commitments, such as school fees and medical care; as well as plug the loss of income that once paid for general living expenses.

While it sounds grim, your family life insurance payout could even cover the cost of your own funeral.

But, before you start shopping around for the best family life insurance deal, it’s important to get to grips with the different types of life insurance cover available.

Decreasing term life insurance

Decreasing term life cover is when the sum assured – the amount that is paid out when you die – is relative to the debt outstanding on your mortgage. So, as your debt to the mortgage lender decreases, so does the amount paid out by the insurer over the term, which is typically 25 years.

For example, if in year one, your outstanding mortgage is $200,000, this is the sum that would be paid out to your beneficiaries if you die. If, in year 24, the outstanding sum is $1,000, this is the sum that would be paid out if you die.

Your monthly premiums however, remain the same.

Level term insurance

Level term life cover is when the sum assured remains fixed for the term. If this was $200,000 for example, this is the sum that will be paid out in year one or in year 24 of your mortgage.

Level term cover will usually create a surplus of funds to your mortgage. Because of the higher level of cover you receive, monthly premiums are higher than those on decreasing term policies.

Whole of life insurance

Whole of life policies pay out whenever you die and are linked to investments such as pensions or endowments.

The premiums are more expensive than on level term insurance and – if the investment fund does not perform to target over the years – there is a risk that your premiums can go up.

Joint or single life insurance

Whichever kind of family life insurance you opt for, it can be taken as a single policy or a joint life insurance policy.

Typically, joint life insurance pays out on the first death but ceases thereafter and the policy becomes invalid.

However, depending on the circumstances, it can make sense to opt for two individual life insurance plans for you and your partner, which will double the pay-out as both deaths will be covered, rather than just the first. The cost of taking out two separate policies rather than one joint policy could also be minimal.

Extra options for family life cover

With any type of family life insurance, you can opt to add on extras to the policy.  One of the most important of these is critical illness insurance, which can otherwise be taken as a standalone policy.

Critical illness cover pays out if you contract one of a list of conditions, ranging from a heart attack to Parkinson’s disease, so long as it is severe enough to meet the rather grim definitions stated within your policy’s terms and conditions.

When critical illness is combined with life insurance, the payout will occur only once on whichever morbid event happens first – death or contracting a serious illness.

You can also choose to add a waiver premium onto your family life insurance policy. This will allow you to stop paying your family life insurance premium if you become disabled.

 

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