‘Family life insurance’ isn’t actually offered as a policy, but is a phrase coined to explain how life insurance can offer your family with financial security if you were to pass away. This can help them with payments towards a mortgage, debt, or other commitments you might have left behind. Your life insurance payout should ideally also help your family maintain the same standard of living that they had when you were alive.
What life insurance policy is right for my family?
There are several types of life insurance that you could consider:
- Level term: this policy makes sure that your family receives a fixed lump sum if you die at any point throughout the policy term. If you took out a policy over 25 years, you’d only be covered for those 25 years. But the payment that your family would receive is the same whether you were to pass away on the first or the last day of the policy.
- Mortgage life insurance: This type of insurance takes into account your debt and standard mortgage repayments. The payout that your family would receive after your death reduces over the length of the policy, to reflect the decreasing value of your mortgage. This is normally the cheapest life insurance option but won’t leave your family with any extra cash beyond paying off your mortgage. So, it may not cover things like funeral costs or any other expenses that they might face.
- Joint life insurance: if you and your partner are both looking to get insurance, taking out a joint policy can make premiums much cheaper than buying two separate policies. However, joint policies only pay out once in the event of the death of the first policyholder.
- Whole of life insurance: this is when the provider offers you cover for your whole life, and pays the sum insured when you pass away. This type of policy is usually more expensive than level term and decreasing term policies because it’s guaranteed that a claim will be made.
How much cover do I need?
The amount of coverage that your family needs depends on what costs they’d need to pay if you were no longer around, and for how long. Think about expenses like:
- Mortgage repayments
- Home maintenance
- Travel and transport costs
- Childcare and education fees
- Food, clothing and general living costs.
The cover amount that you take out should at least cover the money that you have left on your mortgage, so that you don’t leave your family struggling to keep up with repayments. You should then consider adding more financial cover so that your family can continue living at the same standard that they are used to. Generally, this figure will be around ten times your annual salary.
How can I ensure that my family is fully protected?
If you want to make sure your family has financial security beyond your death, you might want to consider further options in addition to basic life insurance cover.
Critical Illness Cover
This is not normally offered as a standalone product but as an addition to a life insurance
policy. It can prove invaluable if you become really ill unexpectedly. This extra will give your family a payout if you’re diagnosed with a listed critical illness during your policy term.
However, if you have critical illness cover combined into your standard life insurance policy, you will still only get one pay-out. This will be either when you’re diagnosed with a critical illness or when you die. The policy won’t pay out for both. Also, adding critical illness cover will increase your premiums, as you are provided with greater coverage.
Some insurers also offer children’s critical illness cover. This can be added onto a parent or guardian’s life insurance as an extra. This could cover the cost of looking after your child, or any additional medical bills that might occur if your child were to become critically ill. You would receive a tax-free payout at the time of diagnosis, to provide your family with financial support.
Life Insurance for Another Family Member
You can also take out a whole of life policy for your child. This can help to secure a lower monthly cost of life insurance for their whole life.
You might also take out life insurance for your elderly parents, to help pay for any costs that you might need covering if they were to pass away, such as debts, inheritance tax or funeral costs. You will need their consent before taking out a life insurance policy for them.
A Policy in Trust
A life insurance payout is normally tax-free. But if your policy isn't written in trust, then your family might have to pay inheritance tax on any money that they receive. Inheritance tax is normally due on the value of your estate above £325,000. Your estate is made up of everything you own, including cars, money, and jewelry, as well as your life insurance payout. You should speak to your insurer and they will guide you on the paperwork. This shouldn’t be at an additional cost to your policy.
When you put your life insurance policy into trust, the money is cared for by a trustee (normally a relative or a solicitor) until the money is paid to your beneficiaries, who are normally your children and spouse. You can set a date for when you want your beneficiary to receive their money, for example when your child turns 18.
Putting your life policy in trust will ultimately make sure that your family gets to keep the full value of your payout, putting them in the most secure financial position possible.
Are there any alternatives to family life insurance?
One alternative to family life insurance is family income benefit insurance (FIB). Under FIB, instead of a lump sum payout, the insurer agrees to pay a set monthly income from the time of the claim, until the end of the agreed policy term.
A regular income can be easier to manage financially, as it can simply replace a lost salary. Premiums can also be cheaper than with life insurance, as an insurer will have to pay out less than if a claim is made later on in the policy. However, this also means that if you die towards the end of your policy term, your family will receive a smaller payout.
When should a family life insurance policy be updated?
Some policies will allow you to increase your level of cover if your family increases in size. You’d have to pay a higher monthly premium for this increased amount of cover though. However, this will help to make sure that your family would have enough of a payout to cover their needs.
If you move to a bigger house and as a result have a bigger mortgage, then you will also need more cover to make sure that mortgage repayments would still be met by your life insurance