Do I need life insurance?
Life insurance is not something that people think about very often, but if you are in the process of buying a home it's a good idea to look at whether you need it or not. Here’s what you need to know.
What is life insurance?
Life insurance is an agreement between an insurance provider and an individual in which the provider promises to pay a chosen sum of money in the event of the individual’s death within a fixed period of time in return for premiums paid.
It is often confused with life assurance or ‘whole-of-life’ insurance policy, which offers protection for a lifetime. This policy guarantees a cash sum upon the death of the individual, whenever it occurs, so it is more expensive than a term life insurance policy (which is normally for a fixed period of between 10 and 25 years).
Why do I need it?
Most people take out a policy to cover the term of their mortgage but it is also a good idea if you are renting with dependants.
If you are single and have no dependants, term life insurance might not be the right cover for you. If you are solely reliant on yourself, you might find that critical illness cover gives you all the protection you need.
Where do you get life insurance from?
You can take out life insurance at any point of your life but most people buy a policy when they buy their first home. Life insurance is offered by estate agents and mortgage brokers and you can also buy it from comparison websites or from the insurers themselves.
What are the main types of policies?
- Level term policy: The amount you’re covered for and the payments you make stay the same throughout the term
- Decreasing policy: The cover drops in line with your mortgage if you have a repayment mortgage, although the premiums remain the sameThe main benefit of a level term policy is that you know exactly how much cover you have, and are more likely to be able to keep your existing policy if you have to increase your mortgage in five or ten years’ time.If you need to increase your mortgage and your policy isn’t enough to cover the loan, you will have to apply for a new policy. As you will be older, it means you will have to pay more if you have any medical issues and you may find it harder to get cover.
- Guaranteed vs Reviewable: A guaranteed premium policy means that your monthly premiums stay the same throughout the term. Reviewable policies are, as the name suggests, reviewed at certain points during the term and are less favourable because you may end up paying more over the long term, as life insurance premiums get more expensive with age.
What things do I need to watch out for?
- Commission fee: Some estate agents and mortgage brokers take huge commission rates from insurers. Commission should be included on their quote but you need to do your research to find out how competitive they are. It may seem like a faff, but it is likely to save you a lot of money in the long run.The amount agents and brokers charge is not publicly available but you can compare like-for-like quotes. If they are for the same policy and provider and one premium is higher than the other, it’s most likely due to the broker taking a larger commission.
- Cancellation fee: Before you buy, check the cancellation policy. Insurance providers request the commission back from brokers, an arrangement known as clawback, in the event of a cancellation to recoup the costs of setting up the policy. Some brokers absorb the costs, while others pass on the fee to the customer.Some policies contain cancellation fees and causes that can tie you in for years, so make sure you read the terms and conditions properly. If you spot them, you should walk away and buy cover from another broker who doesn’t impose these terms.
- Make sure you are getting a good deal: Don’t rely on the first quote. The more quotes you get, the better idea you are going to have about what’s available and the best prices.If you are buying from a broker or estate agent, ask how many insurers they deal with and who they are. Make sure you are choosing from a range of companies, not just one or two.
What are the costs?
Life insurance premiums are paid usually monthly and the cost are calculated on a case-by-case basis.
The approximate costs for a 30-year-old non-smoker (male or female) looking for cover for £250,000 with a guaranteed premium are as follows:
|Term||25 years||30 years||35 years|
|Level life insurance||£9.99 (per month)||£11.29||£12.47|
|Decreasing life insurance||£8.20||£8.96||£9.98|
Source: L&C Mortgages
Is there anything else I should know?
- Life insurance is not compulsory, so it’s completely up to you whether you want it or not.
- If you buy a life insurance premium, it is a good idea to make a will as well that states where or who you want the money to go to.
- As life insurance becomes more expensive with age, it makes financial sense to take out a guaranteed policy in your twenties or early thirties and keep it until the term has ended.
- Look for the best deal, not the cheapest one. Paying slightly higher premiums may mean you get additional benefits.
- You may already have life insurance through your employer, which is known as death-in-service policy.
For further independent advice – whatever your homeowning query – please join us as a member and we’d be happy to help.
- How should I insure my home?
- Do I need a mortgage broker?
- Mortgages for the over 55s
- What happens to my home when I get a divorce / separation?
- Buying with a friend or partner – what to watch out for
- Home Buyers’ Protection Insurance – is it something I should consider?
- What type of mortgage should I get?