Do you need life insurance?

canstockphoto17959883There are all sorts of reasons to think about getting life insurance. Whether you have a partner, children or other relatives who you wish to support after you have died, or you are simply looking to avoid having your family deal with the expense of your funeral, many people can benefit from this form of insurance. But is it really something that you need? Let’s take a closer look at life insurance and who should have it.

How do life insurance policies work?

Life insurance policies either pay out a lump sum or make regular payments to dependants on your death. They are generally put in place to ensure that your family is financially secure after you have passed away.

What is your marital status?

It is arguable that for single people, life insurance is a relatively unnecessary expense. You need to remember that life insurance is generally taken out to cover costs that you would cover if you were still alive. If you are single and live in a property, clearly you will no longer have a need for that property if you have passed on.

However, if you are the only earner in a family, your partner and children may rely upon the money that you provide. In this case, your death will present hardship for them and life insurance will effectively prevent them from suffering financially from your death.

Who is depending on you?

For the majority of people who take out life insurance, it’s done to ensure that a partner or children are not placed in a difficult financial situation if they die. Even if both partners in a relationship work and pay towards the household, the burden of your death might make it impossible for your partner to stay in the same property and support the family without you.

Alternatively, if you have already paid off your mortgage and you perhaps have grown-up children who no longer live with you, life insurance is probably unnecessary. While your death would clearly cause emotional distress to your loved ones, it would not place them in financial trouble.

You could cut your inheritance tax bill

One interesting reason that some people consider life insurance is to cut their tax bill. This is especially true if you are concerned about inheritance tax. This is because when you die you will be charged inheritance tax at 40 per cent of your assets over £325,000 – and remember that your family home is included as an asset.

That means that, for example, if your house is worth £1m when you die, your family will be charged a bill of 40 per cent of the £675,000 (the total over the £325,000 threshold). This means that simply to continue living in the home, your family would need to pay an inheritance tax bill of £270,000.

For many people this is simply unrealistic and unaffordable. However, if you had taken out life insurance, the policy would pay a lump sum on your death which can either pay off or contribute to the inheritance tax bill.

What affects the premiums?

As with all forms of insurance – the greater the risk to your insurance company, the more you will have to pay. With life insurance that means that you insurance premiums are affected by your age and your health, as well as aspects of your lifestyle. If you smoke heavily or drink regularly, this will mean that you need to pay more to take out the policy.

Do you already have it?

It may be the case that you already have life insurance in place. If you work for a business that offers employees death-in-service benefits, they may continue to pay your salary to your family in the event of your death. Given that this is likely to be your major source of income it means that you probably won’t need to take out an additional policy. Check through the terms of your employment to find out if you are already covered.

Would another type of insurance be preferable?

It might be the case that life insurance isn’t actually the ideal option for you. There is a range of different types of insurance that may be better in your situation. For example, income protection insurance pays regular payments to you and your family if you cannot work because you have become injured or seriously unwell.

Talk to a reputable insurance broker and they will be able to give you excellent advice on which kind of insurance policy could be right for you.

Article provided by Mike James, an independent content writer in the financial sector. For the information in this post, Kent-based independent health insurance broker Flexible Health were consulted.