Having children and a mortgage are two of the biggest financial commitments you can make. Research from the Child Poverty Action Group (CPAG) say that the cost of raising a child from birth to age 18, excluding housing, childcare and Council Tax, is now £75,436 for a couple/family.
Even if you don’t have children, paying your mortgage every month can also take up a large chunk of your earnings. According to Office for National Statistics figures in 2016/17, the average monthly payments on a mortgage are £671.23 in the UK, equivalent to £154.90 a week, or £8,054.80 a year.
Considering that the average family needs to find more than £4,000 a year to raise a child, and more than £8,000 to pay their mortgage, it’s important to think about what would happen if you weren’t around anymore.
If your family lost your income, would they be able to afford to maintain their lifestyle, raise your children, or pay the mortgage and stay in the family home?
This is why life insurance can be so important. Despite this, millions of parents and mortgage holders in the UK don’t have any protection in place. A study from Aviva found that more than 40% of mortgage holders have no life insurance.
So, if you want to have the peace of mind that your family will receive financial support when they need it most, here are three types of cost-effective protection you could consider.
1. Level Term Assurance
As the name suggests, under a Level Term Assurance policy you benefit from a fixed amount of protection for a fixed amount of time. The amount of cover will not change throughout the term.
You decide how much cover you would like, and how long you want the policy to run for. Very simply, if you die within the term, the policy will pay out the lump sum amount you specified.
There is no cash-in value to a Level Term Assurance product. Think of it like car insurance – if you don’t make a claim then the policy finishes at the end of the term and you don’t get anything back.
There are several reasons why a Level Term Assurance policy might be suitable for you:
- You have debts that you would like to pay off when you die. This provides a lump sum that can be used to repay any money you owe
- If you have an interest-only mortgage. As the amount you owe to your lender doesn’t reduce under an interest-only arrangement, Level Term Assurance can be used to provide a lump sum sufficient to repay your mortgage
- To provide a lump sum to replace your income. Level Term Assurance provides a lump sum that can either be drawn down or invested to replace your income
- To provide money to enable events that you wish to happen after your death, such as paying for your child’s schooling or university education, or a deposit for their first home.
There are lots of reasons why people take out this type of cover. It’s important that you ensure the cover is sufficient for your needs, and that you select a ‘sum assured’ (amount of cover) that is going to be enough to pay off debts and support your family when you’re no longer around.
Note that many employed workers might be eligible for ‘Death in Service’ benefit. This means that if you died while employed by your company, your employer would pay out a multiple of your salary as a lump sum to your dependants.
Don’t always assume that any Death in Service benefits you have will be sufficient for your needs. For example, if you have young children then four times your annual salary might not be enough to support them until they are financially independent, and so you may still need to consider taking out additional cover privately.
2. Decreasing Term Assurance
Again, as the name suggests, Decreasing Term Assurance provides a lump sum in the event of your death, but the amount of cover decreases over the term of the policy.
As with Level Term Assurance, you select the amount of cover you wish to take out initially, and the term of the policy. The policy will then pay out if you die within the term. However, the main difference is that the sum assured will reduce over time (although your premium typically stays the same throughout).
Decreasing Term Assurance is often used in conjunction with a repayment mortgage. That’s because, if you have a repayment mortgage, the amount that you owe gradually decreases over time.
The amount covered under Decreasing Term Assurance also reduces over time, typically in line with the outstanding balance of your mortgage. It is designed to clear any mortgage debt if you die within the mortgage term. As the cover reduces, this type of cover tends to be a cheaper option than Level Term Assurance.
As it is often used to cover a repayment (capital and interest) mortgage, it’s sometimes called Mortgage Protection Insurance, or Mortgage Protection Term Assurance.
While it is a good option if you have a repayment mortgage and you want to be able to ensure this is paid off in the event of your death, it won’t generally provide any additional financial support for your family.
You should think about what other support they may need in addition to the mortgage being repaid, and whether extra cover might be needed for this purpose. This brings us to…
3. Family Income Benefit
While Decreasing Term Assurance might be suitable to cover your repayment mortgage, and Level Term Assurance might provide a useful lump sum, you might still struggle to meet your day-to-day living expenses even if your mortgage has been paid off.
Family Income Benefit is an affordable way to plug this protection gap. It is designed to pay out a tax-free monthly income from the time you pass away (or you’re diagnosed with a terminal illness) until the end of the term.
A monthly income from a Family Income Benefit policy can ease the financial pressure your family would face if something happened to you. It can be used to cover utility bills and other financial commitments, support your children, maintain school or university payments, or to fund home or care costs for a dependent.
For example, you might take out cover until your youngest child is financially independent – perhaps age 21 or 25. If you die before you reach this age, Family Income Benefit will pay a monthly tax-free income to your family. They can maintain their lifestyle safe in the knowledge that your income has been replaced.
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If you have a mortgage and/or a family, it’s vital that you make sure you have the right protection in place. If you don’t, your dependents may not be able to afford to stay in the family home and may struggle to maintain monthly bills and commitments.
We are life insurance experts, and we can obtain the life insurance cover you need at the best possible price. We work with many of the UK’s leading insurers and we intentionally take a lower rate of commission so we can pass on these savings to you.
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