How to pick the right life insurance policy

Perhaps you're thinking it's about time you got some life insurance. But where on earth do you start? Jane Baker has the answer.

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When it comes to life insurance, not only do you have to choose the right type of policy, you'll also need to take out enough cover - and make sure you and your family are protected for as long as they need to be.

If all that sounds like a headache, fear not. After all, there are certain times in your life when buying protection should be at the top of your shopping list. Let's run through a couple of typical situations:

You buy a home and you want to protect your partner

Getting a mortgage will almost certainly be the biggest debt you ever have. Many couples rely on joint income from both partners to cover the repayments (and other household expenditure), so it's sensible for each of you to take out life cover to provide protection for the other.  

But how much cover do you need?

It's probably best to have enough insurance in place to cover the amount you have borrowed from your lender. The policy should also last for the duration of the mortgage term. Typically, that might last 25 years or so. Although, you may decide you would like to be covered until you retire. 

Which policy?

So onto the policy itself; when it comes to covering a mortgage, many people take out what's known as a level term assurance policy. This type of insurance provides you with a cash lump sum, if a claim is made within the set period of time you choose (the term).

So, let's say your mortgage is £150,000, which you'll repay over a term of 25 years. In this case, you might choose a 25-year level term assurance policy with a sum assured of £150,000. This means you'll receive £150,000 as a cash lump sum, should you or your partner need to claim on the policy at any point over the next 25 years.

If you want to keep the cost of life cover down, you could go for a decreasing term assurance policy instead. A decreasing policy is specifically designed to provide cover for a debt which reduces in size over time, such as a repayment mortgage.

A decreasing term assurance plan will always pay out just enough cash to cover the outstanding mortgage at the point a claim is made.

This is how it differs from a level policy. Remember, with a level policy, your cover stays the level throughout the term, even though your debt is decreasing. So a level policy could provide a surplus amount above and beyond the mortgage debt. This is why a level policy is more expensive than a decreasing policy. 

Tip: If you have other debts in addition to your mortgage, it's probably a good idea to take out enough life insurance to cover these as well. Once you know how much cover you need, you can compare quotes using the lovemoney.com life insurance comparison service.

You want cover to protect your family financially

So you've thought about how much cover you'll need to pay off your mortgage, should the worst happen to you or your partner. But now you need to think about getting enough protection to safeguard your family's financial future.

It may seem morbid, but have you ever thought about how your family would cope without your income if you die? The mortgage may be taken care of, but don't forget about the other costs of running your home, as well as taking care of your children.

You may want enough cover to provide for your family until your children leave home and become financially independent, or for a set number of years.

Which policy?

Again you could take out a level term assurance policy to cover your income. But many families find a large lump sum difficult to handle. So, you could choose what's known as family income benefit instead.

This type of policy pays out an income from the time a claim is made until the end of the policy term.

So how family income benefit work?  Let's say you want to provide your family with a yearly income of £20,000 for the next 20 years. This means when the policy starts, you'll need to insure yourself for £400,000.

I know that sounds like a lot, but if a claim was made in the first year, the £400,000 worth of cover will be used to pay out £20,000 a year to your family for the next 20 years. 

For each year where there is no claim, the cover reduces by £20,000. So that means, if a claim was made after 14 years, the total amount of cover would drop to £120,000 - that is, £20,000 paid out every year for the remaining six years of the policy.

In terms of costs, family income benefit should work out cheaper than the level policy I mentioned earlier, because the cover reduces over time (whereas with a level plan the amount of cover always stays the same).

Tip: If you already have a policy in place to cover your mortgage, you may be able to reduce the amount of protection needed under a family income benefit policy. Make sure you don't over-insure yourself.

Other things to think about

I've covered just two key situations where life insurance is a must. There are many others. Read Eleven reasons why you need more life insurance to find out more. And, don't forget as well as life insurance, it's crucial you think about protecting your health too.

More: Think twice before you cancel your life cover | Don't make this mistake with your life cover | Life insurance - Do I need it?

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