Is life insurance worth it? In many ways, life insurance has had a bad reputation, sold by salesmen. Whilst you do need to be careful in today’s world of digital financial scams, life insurance can play a vital role in keeping your finances safe and protecting your loved ones’ welfare should the worst happen. Below, our financial planning team at Vesta Wealth explains how life insurance works, the different types available and where it can fit into a wider financial plan.
How life insurance works
Most people will know the basic principle of life insurance: it provides a payment or payments to your family if you die.
A policy like this can help provide financial stability to your surviving loved ones in the event of your premature death. This is especially important if you are the breadwinner in your family and you have dependents such as small children. The money can be used to pay off unpaid debts such as a mortgage and / or used as a financial buffer whilst your family adjusts to their new circumstances.
Life insurance can, therefore, bring immense peace of mind, often at a much lower cost than you might expect.
Types to consider
Life insurance comes in many varieties to help cater for different people’s needs. The best type for you, assuming you need it, will depend on your financial goals and circumstances.
As a general rule, if you have no financial dependents then life insurance is less important unless, say, you want to use it within a trust structure to help address an inheritance tax (IHT) bill.
Broadly speaking, there are two types of life insurance: term assurance and whole life assurance. The first type covers you for a defined period of time. For instance, you could take out a policy which lasts until your children become financially independent at age 18 or later. The second type covers you indefinitely until your death. The former is typically cheaper but provides no guarantee that it will pay out; if you do not die before the policy ends, there will be no payment and you do not get the premiums back. The latter addresses this by providing certainty of a payout, but this usually comes with a higher cost.
How to integrate life insurance into a financial plan
According to the 2018 Mintel Report, only 25% of people without life insurance have savings of £10,000 or more, and only 7% have savings over £50,000. This leaves many households financially vulnerable in the event of disaster, as surviving family members may soon find themselves exhausting these savings. Life insurance takes away the pressure to save a large pot to account for any premature deaths of adults in the household. Provided you keep up the premiums over the policy’s lifetime, a lump sum should be available to your family.
Before deciding to take out a life insurance policy, however, it is vital to check what protection you already have in place. Does your employer offer any death in service benefits, for instance? If so, this could provide your family with a payout worth, say, three or four times your annual salary if you die during your employment. Having this reduces how much you may need from a life insurance policy and might even eliminate your need for one at all.
It is also important to check if you have other financial protection policies in place, and whether these may be relevant to you. In particular, critical illness cover, and income protection can be useful supplements (or alternatives, in some cases) to life insurance. The former provides you with a lump sum payout if you are diagnosed with a defined condition such as a stroke or heart attack. The latter gives you a replacement income, valued at a percentage of your salary, if you find yourself unable to work due to severe illness or injury. Depending on factors such as your occupation and your health history, these two options may be worth consideration.
Invitation
If you would like to discuss how life insurance fits with your financial plan, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial advice or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.