Millions of families rely on life insurance products to provide financial support on the death of a loved one.
Life insurance pays out a lump sum if you die and provides a financial cushion for your partner and dependents.
Those who fail to take out cover after buying a property with a partner risk leaving their loved ones unprotected – and saddled with any outstanding mortgage and running costs of the family home.
What happens if you die without leaving a Will?
Term assurance versus whole of life insurance
Life cover can last either for a set term, such as the life of a mortgage, which is referred to as “term assurance”, or it can continue for as long as the policyholder wants, known as “whole of life insurance”.
The amount of money paid out depends on the level of cover you buy and other factors which include age, health and occupation.. You can also decide how it is paid out and whether it will cover specific payments, such as mortgage or rent.
The average pay-out on a term life insurance policy was £60,900 with 98.7% of claims being paid, according to the latest official figures from the Association of British Insurers. In 2014, insurers paid out more than £1.5 billion in claims.
For whole life insurance, the average claim payment was £7,400 with almost all (99.98%) of claims paid. In total £540 million was paid out in 2014.
Alternatively you can look to buy a decreasing term policy which sees the amount to be paid out drop over the period of cover. If you simply want to protect your family from debt repayments, perhaps a mortgage, the amount of cover will fall in line with the amount owed on the loan.
Joint life cover is available by buying two single policies. If anything happened to both lives, both policies would pay out.
What happens if a family member dies and leaves lots of debt behind?
Choosing a policy
You need to look at policy coverage and extras within the cover to ensure you are getting the best value for money and the best coverage.
It is also important to establish the level of cover you need. The basic rule is to have enough cover to pay off your outstanding debts, as well as setting aside a certain amount for dependents too.
When choosing the policy, you should also consider whether you would like to receive an early pay out in the event that you are diagnosed with a critical illness.
Life insurance is often bought and held for its entirety. However, just like other kinds of insurance, it is possible to switch and save on premiums. You might even find a policy with improved terms during this search. However, there are potential risks with switching as any health changes and your age will affect new premiums.
Read more about planning and paying for a funeral.
Honesty is the best policy
You need to take time over the application to ensure you mention any medical conditions. If something is left out it can invalidate the policy.
Medical life insurance is available for people living with pre-existing medical conditions, but it’s likely to be much more expensive.
- The younger you are, the cheaper the policy – so don't delay in buying it.
- Consider writing the policy in trust to help avoid inheritance tax.
- Check with your employer if you have ‘death in service’ benefits, this will cover you for a multiple of your salary and you may not need additional life insurance. Although this will expire when you leave the company.
For more useful tips and information, visit our money articles.