14:03 13 February 2013
Valentine's Day is upon us and if you've somehow managed to miss the barrage of balloons, hearts and fluffy toys you need to make some last-minute plans.
But whether you can't wait to shower your loved one with gifts or have no plans at all to celebrate the 'most romantic day of the year', one way to show your family you really care is to take out life insurance.
Yes, it sounds unromantic, but life insurance is actually a vital way to protect your loved ones. You may not want to think about it, but ask yourself what would happen to your family if you died. Would those left behind be able to keep up with the mortgage payments and household bills if your income was no longer available to them?
Why you need life insurance
Life insurance is essential if you have dependents as it would pay out a lump sum to your family if you died. Your family could spend this on anything they want - whether it's mortgage payments, bills or childcare costs.
Even if you're not the one going out to work every day and are a stay-at-home parent, a life insurance policy is well worth taking out.
After all, someone would have to be paid to undertake the work you do at home and in looking after the children.
In fact, research by MoneySupermarket and Legal & General revealed that dads carry out 50 hours of chores and childcare a week, which translates into a financial cost of £21,306 a year. Mums carry out 71 hours of chores and childcare a week, translating into a financial cost of £30,032 a year.
It's therefore crucial to consider how your family would pay for childcare and the everyday costs associated with running a home if one or both of you were no longer around.
But don't think you are off the hook if you don't have children. Life insurance can still be a vital financial lifeline for your partner if the worst were to happen to you.
What are the different types of policy?
Term insurance is the most basic type of policy. You pay a monthly amount for a set period, say 25 years, and the policy will then pay out a lump sum if you die within that term.
There are three different options for term insurance:
• Increasing term insurance - where the level of cover rises over time to combat the effects of inflation (this is usually the most expensive option)
• Decreasing term insurance - where the level of cover decreases over time. This is usually taken out to cover mortgage payments (on a capital and interest or repayment deal) and is a cheaper option
• Level term insurance - where the level of cover stays the same throughout.
An alternative to term insurance is family income benefit. This is cheaper than term insurance and, after a claim, pays out a regular tax-free income each month - much like a salary. This means your family won't need to worry about how to invest a lump sum and instead, can keep the home running as normally as possible.
The payout decreases over time but this is less likely to be a problem if you only need the cover to last until your children are grown up.
How much cover do I need?
How much life insurance you need depends on your circumstances. If, for example, you live in a rented flat with your partner, you won't require as much cover as someone with three children and a big mortgage.
Your priority should be covering your mortgage payments, as this is usually a household's biggest expense. But don't forget about other expenses such as food, household bills, childcare and school/university fees. You might also want to the level of cover to reflect debts such as credit card bills or a personal loan.
As a general guide, many experts recommend an amount - usually referred to as the sum insured - that is equal to 10 times your annual salary, but you might prefer to opt for a figure 25 times your annual salary depending on your financial outgoings and your family circumstances. Remember that a bigger sum insured will attract a higher premium.
Also check whether your employer would pay out anything to your family if you died while working for them. Some companies pay 'death in service' benefits, usually of four times your annual salary. This can be extremely valuable, but don't assume that means you don't need to take out a separate policy of your own - instead, it should just mean you can reduce the amount of cover you buy.
How much will it cost?
The cost of life insurance policies will depend on a range of factors. For a start, you will pay a lot less for your cover if you're young as younger people are statistically less likely to make a claim.
Your health can also affect the price of cover. Certain lifestyle activities, such as smoking, will also increase the amount you pay as there is a greater risk of the policy being called into action.
If you are a couple, it can sometimes work out cheaper to take out a joint life insurance policy rather than two single policies. But a joint policy will only pay out once, usually when the first person dies, leaving your family with no protection after that. Two single policies, on the other hand, often won't cost much more but will pay out when both people die - offering double the protection.
You can learn more about life insurance in our guide and get a quote for your circumstances. If you prefer to speak to someone, you can call one of our team of independent, whole-of-market advisers free on 0800 142 2023.
Further cover options
You don't only have to take out cover to protect your loved ones in the event of your death. Income protection insurance will pay a monthly tax-free income if you had to give up work due to an illness or disability. It will pay out until you're able to return to work or until the policy expires and could prove to be extremely valuable.
Be aware, though, you are unlikely to be covered for redundancy. Instead, you'll need to take out an Accident, Sickness and Unemployment (ASU) policy, which will pay out if you can't work due to an accident or illness or if you are made redundant. The policy typically only pays out for 12 months, although some stretch to 24 months.
Take a look at our income protection guide for more details.
For additional protection, it's worth considering critical illness cover. This pays out a tax-free lump sum if you survive more than 28 days from contracting one of a number of serious illnesses listed on your policy. You can use your payout for whatever you want, whether that's private treatment or to help pay household bills.
Critical insurance policies will cover seven core conditions as set down by the Association of British Insurers (ABI). These are cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. Take a look at our guide on critical illness for more information.
You can combine critical illness cover with life insurance to provide comprehensive protection.
So, this Valentine's Day, rather than showing your loved one how much you care with roses and chocolates, why not bend the rules and take out vital life cover?
Please note: Any rates or deals mentioned in this article were available at the time of writing.
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