There is nothing more important in life than family. However, life is also unpredictable, and there are many things out of our control within it. Should the worst happen and you were to die, who would be there to support your family through this difficult time?
That’s why family life insurance is a great way to provide your family with financial support when you are no longer around to help.
While life insurance or life assurance costs money, the support it offers to our families is priceless. But what exactly is family life insurance and how does it work? Let’s take a look!
How does family life insurance work?
Family life insurance is more than just a single type of life insurance cover or life assurance but refers to policies used to protect your family. Should the worst happen and you die, a life insurance pay-out provides much-needed finances to support them through this difficult time.
Typically, they receive a lump sum pay-out upon your death, which can be used to help with:
- Living costs
- Funeral arrangements
- Household bills
- Rent/mortgage payments)
- Education costs, such as school or university fees
- An inheritance for your children
But before you opt into any form of life insurance, it’s important to understand the types of cover available.
The main types of family life insurance
There are 2 main types of family life insurance – Whole life & term life insurance. Though these types of cover sound similar, they both work in different ways.
Whole life insurance
Whole life insurance (also known as ‘life assurance’) works just like its name would suggest. When taking out a policy, you are covered for the remainder of your life – just as long as you continue to pay your monthly premiums.
Whole life insurance is generally more expensive than other types of life insurance, as it guarantees your family a lump-sum pay-out. This pay-out amount is also fixed, therefore, no matter whether you die in 5 years or 50, your family still receives the same amount of money.
The downside is your policy is not protected from inflation, so the value of your policy may be lower than when it began.
Term life insurance or life assurance
Term life insurance is usually cheaper than whole life insurance, however, it does not provide a guaranteed payout. Instead of being permanently covered, you are covered for a set amount of time, such as 20 years. If you die within that period, your family will receive a pay-out.
If you survive the term, you will no longer be covered and won’t receive repayment for the premiums paid.
Term life insurance works in 3 ways:
- Level term – The policy pay-out remains the same through the length of the policy. Similarly to whole life insurance, the pay-out is not protected from the effect of inflation. Therefore, the policy may not be worth as much as before.
- Increasing term – The value of the policy increases over time to protect the eventual pay-out from inflation. When you die, your loved ones will receive more money than the policy was originally worth. Though the value increases, so too can your premiums.
- Decreasing term – Often taken out alongside an outstanding payment, such as a mortgage or loan.
Other forms of cover for your loved ones
Life insurance isn’t the only way to protect your family’s future. Luckily for us, there are several alternatives to life insurance, providing financial support to your family when you die.
Family income benefit
Family income benefit is a type of coverage that pays out monthly sums to your family, instead of a single lump-sum payment. It’s designed to act as a replacement for your wage. Just like term life insurance, you are covered for a set period of time, except you have to die within that period to trigger a pay-out.
Critical illness cover
Critical illness can be purchased as an individual policy or as an add-on to an existing life insurance policy. The policy will payout if you are diagnosed with a critical illness. Not all insurers cover the same illnesses, so it’s important you understand the terms of your policy agreement.
Some insurers may allow you to cover your children. If they are diagnosed with a critical illness, you could then use the pay-out to pay for any medical costs, like private health care.
Income protection insurance
Income protection provides financial support to you and your family if you are unable to work due to illness or injury. . The policy pays out as a percentage of your salary and can be bought for short and long term cover.
Death in service benefit
Death in service benefit is typically offered to you by your employer. When you die, your employer multiplies your salary, paying it to your family to cover the loss of income.
It’s important to note that you are only eligible for a pay-out if you are still working for the same employer. Few of us remain in the same job for our entire life. Should you leave, you will likely forfeit your death in service cover.
What affects the cost of family life insurance?
There are a number of factors that affect the cost of your life insurance policy. Prior to taking out cover, your insurer will ask you about:
- Your age
- If you smoke
- How much cover you want
- The type of cover you need
Unlike car insurance – where the cost of cover reduces as you get older – life insurance is cheapest when you are young. Your health is a massive factor in determining the cost of your policy. If you have any pre-existing health conditions, you can expect to pay more from premiums. Your insurer may also want to know about your family medical history.
Smoking is not only bad for your health, but also increases the costs of a policy. However, some insurers will reduce your premiums if you quit, as an incentive.
Should I take out a joint policy?
A joint life insurance policy provides cover for two people under one policy. Many couples find it beneficial to take out a joint policy, as opposed to two single policies. Not only can it work out cheaper, but it is also easier to manage.
There are two types of joint cover – first death & second death.
With first death, the policy immediately pays out upon the death of the first policyholder. The surviving policyholder will then need to take out further cover should they need it.
A second death policy only pays out once both policyholders have died. If both parents opt-in for a joint policy, the pay-out can then go to their children to provide for their future.
Obviously, you only need a joint policy if you have a partner or spouse. If you have an ex-partner with whom you share a child, it may make sense to take out a joint policy.