People generally accept that they need life insurance once they have a mortgage and responsibilities. Obviously it makes sense to cover the amount that you would owe on your mortgage on your death, so you need cover for the length of your mortgage, but have you thought this through?
It s all very well knowing that you leave your dependents mortgage free, but it doesn t stop there. There may be other debts which you have taken on and these would need paying too. Then there are the costs of keeping your dependents without your income. If you haven t allowed for this in your calculations or provided money from another source, they re surely going to struggle after you’re no longer around for them.
If you have children it s especially important that both you and your partner have some life insurance in place as it needs two parents to support them. You may both earn an income and look after the children between the two of you, but if anything happened to either of you, the children would be the first priority and this may well mean that the partner left behind would have to give up work, or pay for help, to care for them.
If you don t have children, you could still be in the position where people rely on you financially. Your parents, for instance, could require support or maybe your other half may not be employed. They would need protecting if you were to die and insurance would be necessary. Another point you may not have thought about is the fact that you may be dependent on someone else. If that person were to die, how would you cope financially? It s a simple, but overlooked, matter to take out life insurance on someone else.
Only you can guess at how much money you d need to protect your family. Apart from all the debts that you owe, you need to work out just how much money would be needed to allow the family to live at the standard which they re used to. You need to budget for things in the future, such as costs of education and university expenses.
As the family become independent, your cover can be reduced. Of course, in the meantime, the family demands may have meant you ve moved to a bigger house and a much bigger mortgage, so things will have to be juggled around.
While life insurance policies pay out a lump sum during the term chosen, a Family Income Benefit policy can be used to provide a monthly or annual income instead. Again, you might decide you need cover until your youngest turns 18, or beyond.
Put simply, whilst life insurance pays out a lump sum, family income protection will provides a fixed monthly sum, from when you die until the end of the agreed term. Because life insurance guarantees a lump sum whenever you die, the insurers will eventually pay out the full amount. With family income protection, the monthly amount stays as agreed (although it can be inflation related) and only comes into play on your death, so the insurer could pay far less, especially after the first years of the policy.
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