Do I need life insurance?

Insuring your life is a slightly odd concept as it is one of the few things you pay for that you never actually benefit from! However, knowing your family will benefit financially if you die can be a great comfort to some people, but do you need it?

Before we answer that question, it’s important to clear up a common misconception. People often use the terms “life assurance” and “life insurance” interchangeably when referring to an insurance policy which pays out when you die. Many people assume they are the same thing, but they are not.
Whilst life assurance and life insurance do have similarities (you pay monthly insurance premiums and, if you die, money is paid out to your estate or a person you choose) there are some key differences it is important to understand.

What is Life Insurance?

A life insurance policy covers you for a specific amount of time and only pays out if you pass away when the policy is in place. It’s quite common that a mortgage company will require you to have life insurance in place so that your mortgage can be repaid if you should die. Similarly, your employer may provide life insurance as a benefit whilst you are employed by them. However, when you have repaid your mortgage or you leave your job, your insurance policy will end.

Because life insurance policies are for a fixed amount of time, be it one or 25 years, insurance companies calculate premiums based on your age, health, job, and a few other factors, and the statistical likelihood of you dying within that time and, therefore, them having to pay out on your policy. The higher risk they consider you, the higher the premiums you will pay, and vice-versa. However, life insurance policies are inexpensive compared to life assurance because, assuming you survive the term of a life insurance policy, the insurance company will have received your premiums without having to pay anything out.

What is Life Assurance?

A life assurance policy, on the other hand, offers protection for your lifetime; from the moment you take out the policy until the day you die. That is why life assurance policies are often referred to as “whole life” policies. In essence, if you keep paying your monthly premiums, the policy should pay out a lump sum when you die, no matter how old you are.

Of course, the fact that life assurance covers you for your “whole life” means that the insurance company will generally have to pay out on your policy one day. This means that life assurance is generally more expensive than life insurance, but the fact that it provides a guaranteed pay-out to your loved ones whether you die suddenly, or live to be 100 years old, means that many people consider the extra expense to be worthwhile. In fact, some people consider it a way of “putting money aside” for their loved ones in the future.

So, should I insure my life?

Apart from a few instances where a life insurance policy is required (such as with some mortgages), there is nothing to force you to insure your life. However, consider the following: Would your family struggle financially if you were to die? If the answer is yes, then some sort of insurance is worth considering.

How much does life insurance and life assurance cost?

Regardless of what sort of policy you choose, the amount paid out when you die (the “sum assured”) will impact the premium you pay. A large sum assured will result in higher premiums than a smaller amount and so deciding what you want your policy to fund in the event of your death is an important consideration.

This will, naturally, depend on your personal financial circumstances, but some people want their policy to cover their family’s living costs going forward, clear debt, pay off a mortgage or fund children through University, if they are no longer around. Conversely, many people have policies which will cover the cost of their funeral. It is entirely a matter of personal preference and circumstances.

It is important to remember that your policy will only remain valid if your premiums are paid. It is therefore important to ensure that it is affordable both now, and in the future. This is particularly important with life assurance as the policy is for the whole of your life and it could mean having to continue to pay premiums even after you retire.

Fortunately, most life assurance policies do allow you to cash them in if you no longer need them or can no longer afford them, although the “surrender” value of a life assurance policy is likely to be lower than the premiums you have paid. This is not the case with life insurance though, where there is no “surrender value”. Simply put, if you stop paying life insurance premiums, the policy ends.

Your age, profession, medical history, whether you are a smoker, your credit score, and a few other factors also influence how much your premium will be for both types of policy. As a result, two people of the same age and seeking the same sum assured may pay different premiums. There are online calculators available which let you check how different “sum assured” amounts will affect how much you’d have to pay for both life assurance and life insurance policies, so it is worth taking some time to see what level of cover and type of insurance you can get to suit your budget.

Should I get life insurance or life assurance?

Ultimately, whether you choose life assurance or life insurance will depend on several things including your personal and financial circumstances.

Life assurance can be a good way to help your loved ones cover any costs associated with your death, such as your funeral and inheritance tax, as well as provide a lump sum to help make their financial future more secure. It is more expensive than life insurance because a pay-out is generally guaranteed upon your death, whenever that might be. If you do choose whole-of-life cover, you can also consider writing the policy ‘in trust’. This means that your family would not have to pay inheritance tax on the otherwise tax-free pay out. An independent financial adviser can explain this in more detail.

However, if your main concern is for your mortgage to be paid off if you die suddenly, or to support your dependents because you are the main income earner, life insurance can be a more cost-effective option. Keep in mind that these policies are fixed term, and once a life insurance policy finishes, renewing it can mean increased insurance premiums because you will be older and considered a higher risk. In some instances, such as if you have experienced health issues or are above a certain age, it may also not be possible to get life insurance.