Life assurance, do you really need it?

Life assurance, who needs it? Everyone say the salesmen. Not me, you respond, at least not until I die! So what’s the truth – when should you buy life assurance, what kind should you buy, and where should you get it from?
In the first of a series exploring all of the different types of ‘protection’ on the market we have a look at some of the basics of life assurance. In the coming weeks we’ll be looking at how life assurance interacts with critical illness cover and income protection, and how you should decide which type of cover is best for you.
Let’s start with the question that is asked so often. What’s the difference between life insurance and life assurance? Answer, nothing really. Technically you ‘insure’ your car because you might have an accident but you ‘assure’ your life because you will die! Nowadays the terms are used interchangeably.
So who needs life assurance and how should you buy it? Well anyone who has a mortgage should really have that debt protected, and the same applies for any other loans. In fact it used to be the case that banks and building societies often wouldn’t actually advance you your loan until they had seen proof that a life insurance policy had been set up.
On top of this protection for a loan you might also want to leave an amount of money to ensure that any dependents can be looked after in the event of your untimely death. How much that sum should be, and how long it would need to last, are questions that are dependent on your own circumstances. If you have very young children and a partner that doesn’t work then you might need ‘a lot’ of life assurance however if your kids are at university and your partner has a well paid job that would continue after your death then you might not need very much at all, if any!
The cheapest way to buy life insurance is to use ‘term insurance’. This will pay out a certain amount of cover over a certain period of time. So if, for example, your mortgage is for £100,000 and the loan is over 25 years then you would want £100,000 term assurance over 25 years. Of course a lot of mortgages reduce with time so in this case you would look for ‘decreasing term assurance’ where the amount paid out on death would decrease in line with the amount outstanding on your mortgage. If your mortgage is set up on an ‘interest-only’ basis then you would need ‘level term assurance’ since your loan will never decrease from the initial amount borrowed until you pay it off.
You need to decide whether you want your cover to be set up in your name only, or as a joint policy with your partner. If you are looking to protect a loan like a mortgage then it usually makes sense to have you both named on the policy. You need to remember though that with most joint policies the payout will happen on the first death, and this could leave the surviving partner with no insurance, and perhaps unable to get any if any health problems have surfaced since the joint policy began.
There are thousands of different life assurance polices on the market so it really does make sense to have a look round and see what is on offer before making up your mind. The best way to do this is to talk to an independent financial advisor who should have access to the whole market and should point you in the right direction. Check in advance whether your advisor is going to receive commission for the sale of the policy or charge you a fee for giving you advice. This might mean you paying something up front but is likely to lead to a reduced monthly ‘premium’ since your advisor’s fee is not coming out of the policy payments.

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