Updated 03 December 2020
‘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.
That’s why people often talk about ‘family life insurance’ when referring to life cover taken out by people with children. Here we explain why this may require a bit more thought and professional advice than taking out a basic life insurance policy.
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.
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.
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:
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:
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.
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.
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.
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.
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.
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.
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