‘Family life insurance’ is really just another name for life insurance. It’s not a special type of insurance, but is a very good description of the main benefit of life insurance: protecting your family.
But it’s far from the only way of protecting your loved ones financially. Here’s everything you need to know about getting family life insurance, what it entails and whether it’s right for you.
What is family life insurance?
When people take out family life insurance, they are trying to ensure that their children and/or partner will have enough money to support them in their event of their death. This can be a uniquely challenging task, compared to taking out life insurance for some specific cost such as paying off a mortgage or funeral expenses. In the latter examples it is clear how much money will be needed, but when it comes to taking care of your family’s future needs, there are many more unknown factors involved.
This is why family life insurance is often talked about as if it were a separate product. In reality it is a catch-all phrase used to describe a group of insurance products that families can use to protect themselves in the event of a major earner dying.
How does family life insurance work?
Family life insurance is designed to pay out a lump sum that can be used not only to pay off the mortgage and other debts, but also replace the lost earner’s income for a period of time (perhaps many years). In this way it can cover day-to-day expenses and also future costs, such as education.
This type of policy works in the standard way: you pay a monthly premium to the insurer in return for the agreed level of protection if you die. If you die during the agreed policy term, the beneficiaries you have named (in this case your spouse and/or individual children) will receive either a single payment or regular instalments. You can usually tailor your policy in a way that best protects your family.
How much does family life insurance cost?
The cost of family life insurance will vary depending on a few different conditions. Ultimately, your premiums will depend on your age, health, lifestyle and how much coverage you want.
The cost of your insurance will be also dependent on what kind of insurance package you want. There are a few different kinds of policy you may choose, so this is one of the major considerations for you to make.
How much life insurance cover do I need?
In order to best protect your family and loved ones, many financial advisers will recommend an insurance deal large enough to cover your mortgage, debts and other bills and expenses.
This may often translate into an insurance deal of around 10x your gross annual salary, or potentially higher depending on your family outgoings.
What are the different types of family life insurance?
Family life insurance policies can be broadly divided into different categories, depending on the type and length of cover required.
The first distinction is between policies with fixed and non-fixed terms.
A fixed-term policy will pay out only within a set timeframe, e.g. 10 or 20 years. You pay premiums during that time, and if you die within that period the policy will pay out. A fixed term policy may be suitable if (for example) you want to cover the period that your children are under 18, and stop it when they reach adulthood.
There are two kinds of fixed-term policies:
- Level-term life insurance – your family receives the same lump sum as long as you die during the agreed policy term
- Decreasing-term life insurance – the amount of payment goes down the longer the policy goes on. This type of policy might cover long-term debt such as a mortgage, which reduce as time goes on, or take account of the fact that as children grow into adults their level of dependency should decrease.
Whole-life family life insurance policies, on the other hand, protect your family for your entire life. These policies guarantee a pay-out when you die, but naturally they also come with higher monthly premiums. Typically, the payout will decrease the older you get – so your family would receive a high payout if you die very prematurely, but a much smaller one if you end up dying of old age.
Next, you need to decide between a joint or single policy:
- Single family life insurance policies only cover the death of one individual
- Joint policies cover the death of multiple individuals, e.g. two parents (this need not be at the same time)
Taking out a joint policy is usually a bit more cost-effective than taking out two single policies, but the lump sum will be paid to the surviving parent rather than to the children.
How much will be paid to my family?
You will be able to decide whether your beneficiaries receive the payment as a lump sum or as regular payments. Regular monthly payments may be better if you are looking to replace regular income, or want to cover mortgage payments. A lump sum can also achieve these goals, but managing a large lump sum can be a job in itself. You should seek independent financial advice on where to keep the money to ensure growth and protect it from inflation.
Whether you go for a lump sum or regular income, the exact amount your family receives will depend on the type of policy and its particular terms.
When should I update my insurance?
Even once you’ve found an insurance deal that you’re happy with, you should always keep it under review. You will always need to keep an eye on your insurance deal to make sure it remains accurate to your family’s situation, particularly if your lifestyle or employment circumstances change dramatically.
It is always best to avoid overpaying for an insurance deal, so speak to a financial adviser to ensure you’re getting to best deal possible.
When will the family life insurance money be paid?
If you die within the agreed policy term, the insurer will release the money directly to your named beneficiaries, e.g. your spouse or children. The speed at which this happens will depend on how quickly your beneficiaries notify the insurance provider, so make sure you tell them about your family life insurance policy. Discussing death may be uncomfortable, but it’s important to do this so that you can fully support and protect your family.
If the money is to be paid to children under the age of 18 (e.g. if there is no surviving adult parent or guardian) then you can arrange for the money to be paid into a trust, where it can be managed until they are of an age when they can take control of it themselves. For this you will need a solicitor.
Who in my family will the money be paid to?
If you take out a joint policy, the surviving policyholder will receive the money. It is also possible to cover more than one child with a particular policy, but this will depend on the specific insurer. If you have a single policy, it is completely up to you who you name as your beneficiary.
Can I take out insurance so my whole family is covered?
An increasing number of insurers are offering group policies. These policies do not necessarily mean that each beneficiary gets an individual sum, but the fact that they are named means they have an entitlement to benefit from the money. Whether or not you think this is important will depend on a range of factors as well as the type of family life insurance policy you have. Ask your adviser about this.
How do I get the best family life insurance policy?
Though price comparison sites can give you a broad idea of the policies available and the premiums you can expect to pay, they are limited by the algorithms in their systems. An independent financial adviser who specialises in life insurance can make a world of difference when it comes to finding a better value policy that is fully tailored to your needs. This is especially the case if you have any pre-existing conditions or risk factors in your life that might make you harder to insure. Bespoke advice can result in people who previously struggled to find life insurance being offered very affordable policies.
What are the alternatives to family life insurance?
Family life insurance is only one way of providing for your family in case of your death. For alternatives to family life insurance, consider the following:
A decreasing term will cover your mortgage outgoings. Your current mortgage ‘debt’ is what your coverage amounts to, so the more you pay off on your mortgage, the less coverage you will be eligible for.
Family Income Benefit
Another alternative to a lump-sum payout, family income benefit provides an annual tax-free amount. Depending on your agreement, your family could receive an annual benefit every year to go towards future costs.
Over 50s can find it difficult to get insurance deals, but over 50s insurance offers guaranteed coverage up to the age of 80 or 85.
Whether or not these are the right alternatives to family life insurance or not will depend on you and your family’s circumstances. If you’re not quite sure which offers are the best ones for you, speak to a financial adviser.
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