If you're a parent, protecting your family's finances should be your top priority.
If you're the main earner in your household, have you ever considered how your family would cope without you? Who would pay the mortgage? Who would pay for childcare? And, who would pay the bills?
Despite these crucial questions, new research from insurer Bright Grey reveals that more than 1.5 million parents have never given life insurance a second thought. Worse still, seven million parents don't have enough cover to protect their families.
That really worries me. I think life insurance should be your number one priority if you have people in your life who depend on your income.
Thankfully, buying a life insurance policy isn't as difficult or expensive as you might imagine. For example, let's assume you're a 35-year old dad and you want £100,000 worth of cover until your 60th birthday. If you're in good health and you don't smoke, your policy could cost as little as £8.74 a month.*
I think that's a small price to pay for the protection and peace of mind it will provide.
How to get the right cover
But it's really important you buy the right protection for your family's needs. There are two different types which will do the job: level term assurance or family income benefit.
Level term assurance will leave your family with a cash lump sum if a claim is made at any time during the term you choose. The amount of cover will stay exactly the same throughout. Your family might use this lump sum to clear the family mortgage and pay off any other debts.
The second type of policy - family income benefit - will provide your family with a monthly or yearly income from the time a claim is made until the end of the term. Your family might use this type of policy to replace some or all of your income.
Remember with both plans, once the term has ended, the protection will stop.
Which policy should you choose?
If you need to keep the cost of your policy down, family income benefit is the cheaper option. That's because the amount of cover it provides reduces over time.
Let me explain: let's say you set up a 20-year policy which will pay your family a yearly income of £15,000.
If a claim is made in year one, the total payout will be £300,000 - that is, a yearly income of £15,000 paid for the next 20 years. But if a claim isn't made until year 10, then the total payout decreases to just £150,000 - or, a yearly income of £15,000 paid for the remaining 10 years of the term.
For this reason, family income benefit costs less than level term assurance. But if you want the amount of protection to stay the same, you will need to pay a bit extra for a level policy instead.
Some families may prefer an easier-to-manage income rather than a more daunting lump sum. You could even consider combining the policies together by using a level term plan to pay off the mortgage and debts, and a family income benefit plan to replace some of your earnings.
Decreasing protection
If you're going to separate your family's protection in this way, then you can reduce the costs again by using a decreasing term assurance plan to cover your mortgage, rather than a level policy.
A decreasing policy provides an amount of cover which falls in line with your outstanding mortgage as you gradually pay it off over time. This makes the plan cheaper than a level term policy.
That said, while the cover under a decreasing plan will only clear the mortgage, there could be a surplus with a level plan which your family could use to pay for something else.
(Remember a decreasing plan can only be used to cover a repayment mortgage. With an interest-only mortgage the debt isn't reducing, so a level term policy must be used instead.)
How much cover do you need?
Once you've decided which type of policy suits you best, the next step is to choose the right amount of cover. This can be a bit tricky, but take a look at Life insurance: how much do you really need? for starters.
As we have already seen, you'll need enough cover to pay off your mortgage and debts. This is a great way to ease the financial burden for those you leave behind.
But protection needs don't stop there. If you pay for care or school fees for your children, then you'll need to include these costs too. And, you'll also need to factor in expenditure on household bills, running a family car, funeral expenses and so on.
If your surviving spouse/partner has an income, this can be deducted from the overall amount of cover you'll need. The same also applies to any savings, investments or assets you might have. But, don't forget, if there's no longer a mortgage or debts to pay for, then your family's day-to-day living costs will reduce.
Stay-at-home mums and dads
On a final note, it's not only the main wage earner who needs life cover. Full-time parents who stay at home to care for their children need protection too. Find out more in Why stay-at-home mums (and dads) need life insurance.
Compare life insurance quotes at lovemoney.com
*Based on the most competitive premium available today available through lovemoney.com's life insurance search engine.
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