Life Insurance And Pandemics: All You Need To Know

How you would your family or partner manage if your income suddenly stopped in its tracks? Life insurance is a type of protection designed to help your loved ones coverage mortgages, debts, and day-to-day expenses when you are no longer around.

How Does Life Insurance Coverage Work?

– Premium Payments: You pay regular premiums, either monthly or annually, to a life insurance company.
– Lump Sum Payout: If you pass away during the policy’s term, a lump sum is paid out to your beneficiaries—such as your family or dependents.
– Flexible Use: Although beneficiaries can use the funds as they wish, it’s common for the payout to be used to:
      Clear the mortgage
      Settle outstanding debts
      Cover household bills and living costs
      Fund childcare and other essential expenses

Why Should You Consider Life Insurance?

Life is unpredictable, and none of us knows what the future holds. Recent events, like the COVID-19 pandemic, have highlighted the importance of having financial protection in place.

Here’s Why Life Insurance Matters:

– Peace of Mind: Life insurance ensures that your family will be financially secure if you’re no longer able to provide for them.
– Financial Safety Net: Without this coverage, your loved ones might face significant financial strain, adding to their stress during an already difficult time.
– Support During Tough Times: It helps prevent additional hardship by covering essential expenses such as bills, debts, and daily living costs.

In essence, life insurance offers reassurance that your family will have the support they need to stay financially stable, no matter what happens.

When Should You Take Out Life Insurance?

Certain life events often trigger the need for life insurance. Key moments to consider taking out a policy include:

– Buying a House: Protect your mortgage and ensure your home is secure for your family.
– Getting Married: Provide financial stability for your spouse.
– Having a Baby: Ensure your children’s future is financially secure.

As your life changes, you may need to increase your coverage. For example, you might need more coverage if you:

– Have more children
– Take on a larger mortgage
– Experience significant lifestyle changes

While higher coverage levels can lead to higher premiums, the peace of mind knowing your loved ones are protected is invaluable. Investing in life insurance is about securing their future and alleviating financial worries, regardless of what life may bring.

How Much Coverage Do You Need?

Determining the right amount of life insurance coverage is crucial to ensuring your loved ones are adequately protected. Here’s a guideline to help you decide:

1. Cover Your Debts: Ensure your policy covers outstanding debts, including:
– Mortgage
– Credit cards
– Loans

2. Daily Living Expenses: Factor in costs for:
– Household bills
– Car payments
– General living expenses to maintain your family’s standard of living

3. Income Replacement: Experts suggest starting with a coverage amount of around 10 times your gross annual salary. Increase this to 15 or even 20 times if you have substantial financial commitments or dependents relying on your income.

By considering these factors, you can tailor your life insurance policy to provide a financial safety net for your family, ensuring they are well-supported in your absence.

How Much Will It Cost?

Life insurance can be surprisingly affordable, with premiums starting as low as $5 a month. However, the exact cost will vary based on several key factors:

1. Age: Younger individuals typically pay lower premiums.
2. Health: Good health can lower your premiums, while existing health conditions may increase costs.
3. Lifestyle: Habits such as smoking or lack of exercise can raise premiums.
4. Coverage Amount: The more coverage you need, the higher your premium will be.
5. Term Length: Longer-term policies generally have higher premiums.

– Lower Costs When Young and Healthy: Securing a policy at a younger age can lock in lower rates.
– Health Conditions: Premiums may be higher for those with health issues that could lead to a shorter lifespan.
– Customizable Coverage: Tailor your policy to balance cost with the level of financial protection needed for your loved ones.

By understanding these factors, you can find a life insurance policy that fits both your budget and your family’s needs.

Term Life Insurance

In broad terms, the most common form of life insurance, ‘term insurance,’ is the most affordable option as it only pays if you die within the specified term of the policy. This is opposed to ‘whole life’ coverage which pays out whenever you die. Term life insurance falls into three different types: decreasing term, level term, and increasing term. Here’s an outline of each.

Decreasing Term Insurance
With a decreasing term policy – the most common type of ‘term’ coverage – the amount that will be paid out in the event of death decreases over time, making it most suitable if your financial commitments will also reduce over time. The most notable example of this is a repayment mortgage, where the life insurance payout decreases in line with the projected fall in your mortgage balance. Decreasing term insurance is cheaper than level term insurance and often the most cost-effective option. However, if you have children who depend on you financially, level term coverage may be a better option.

Level Term Insurance
A level term policy pays out a fixed amount if the policyholder passes away within a pre-selected period of time – known as the policy ‘term’. No matter how many years into the policy you pass away, your beneficiaries will receive the same payout – known as the ‘benefit amount’. This makes level term coverage well-suited to an interest-only mortgage, where only the interest is paid off but the capital debt does not decrease. While premiums remain the same during the term, they tend to be more expensive than those attached to decreasing term coverage. If you survive the ‘term,’ your coverage will end, and you will need to purchase a new life insurance policy.

Increasing Term Insurance
With an increasing term policy, the amount insured goes up every year by a fixed amount for the length of the policy. This is designed to protect your policy’s value against inflation. Because the amount of coverage increases over time, premiums tend to be more costly than other types of life insurance.

Whole-of-Life Coverage
Unlike term insurance (which only pays out if you die within a specified period), a whole-of-life policy is designed to run for the remainder of your life. So, provided you keep paying your monthly or annual premiums, your loved ones are guaranteed to receive a payment when you die. For this reason – and because whole-of-life coverage does not require a medical exam or take into account your pre-existing medical conditions – premiums for whole-of-life insurance tend to be more expensive than term insurance.

Furthermore, as this type of policy is typically linked to a specific investment, your premiums may also increase if that investment does not perform well. Usually, you will need to pay premiums for the rest of your life, although there are some types of whole-of-life coverage (such as over-50s) that allow you to stop paying but still be covered once you reach a certain age, such as 90. Payouts for whole-of-life coverage are often used to offset any inheritance tax bill that your loved ones may receive in the event of your death.

Single Life Insurance
This type of policy covers just one person, as opposed to joint life insurance (see below) which is used to cover a couple. That said, if you’re in a couple, you might consider taking out two single policies so your dependents could potentially receive two payouts. However, this approach tends to be more expensive than a joint policy as you will also have to pay two sets of premiums, rather than one.

Joint Life Insurance
A joint life insurance policy covers two people, usually who are married or in a civil partnership. (It’s possible to buy joint life insurance just as a couple, although some insurers may stipulate you must live in the same household.) Joint life insurance means you pay just one premium which will provide coverage for you both. However, the policy only pays out once – on the first person to die within the term.

Before taking a joint policy, it’s worth checking whether two single policies could be better. While it means two sets of premiums, it also means two potential payouts.

Have Your Policy ‘Written in Trust’
It could be worth getting your life insurance policy ‘written in trust’ as money in a trust is no longer your asset, so not liable to inheritance tax. If you do this, the payout from the life policy goes directly to the beneficiaries, rather than your estate, meaning it won’t be taken into account when inheritance tax is calculated. Neither income tax nor capital gains tax is charged on life insurance payouts.

Mortgage Life Insurance
This type of life insurance – also known as ‘decreasing term insurance’ – pays out if you pass away before you have paid off your mortgage. As this coverage is tied to your mortgage, the amount covered decreases as you continue to pay it off. Note that if you bought this coverage from your lender when you took out your mortgage, you could be paying over the odds, so it could pay to switch (ensuring, of course, you leave no gaps in coverage).

Critical Illness Coverage
Many life insurance policies allow you to add on critical illness coverage for an additional cost. It pays out a tax-free lump sum if you are diagnosed with a specific illness or medical condition listed on your policy – such as cancer, heart attack, stroke, or loss of limb – during the term. Its purpose is to offer a financial buffer at a highly stressful time of life and support if you have to stop working. The funds paid out can be used to ensure your mortgage and other major financial commitments are paid. The money can also be used to make any required adjustments to your home that make life more comfortable.

Critical illness coverage is considerably more expensive than life insurance. So, while you should look to take out enough coverage for your mortgage, debts, and monthly bills, in reality, it may be a case of seeing how much you can afford. Also, be sure to read the small print carefully, as insurance companies have a finite list of conditions they will cover. This can run to more than 100, but if your illness isn’t included, you won’t get a payout. You may also be declined if you have withheld information about your medical history or if the illness you contract isn’t advanced enough.

Income Protection
Income protection will pay out a regular income if you are unable to work due to illness or injury, thus enabling you to continue to meet your monthly outgoings. Many policies come with a ‘deferral period’ where you won’t receive a payout for, say, the first six months of being unable to work. But the best policies will continue to pay over a long period of time until you are fit enough to return to work – or reach retirement age. The amount you take out is usually based on your salary. Premiums can be guaranteed or reviewable.

Look for policies that pay out if you cannot carry out your ‘own occupation’ rather than ‘any occupation’ at all as, in reality, this would make a big difference to the value of the policy. If you don’t have dependents, income protection is likely to be the most important type of coverage. It can also be crucial if you are the main breadwinner or sole earner in your household. Equally, income protection can be especially important for the self-employed who are not entitled to sick leave or pay from an employer.

This comprehensive overview of life insurance options should help you make an informed decision about which type of coverage best suits your needs and circumstances.