Having a child is one of life’s most precious moments. Yet as well as being hugely exciting, it also brings with it many new challenges.
If you want to provision for the future as your young family grows, it’s crucial that you have the correct insurance in place.
“Not everyone needs life insurance. But if your children, partner or other relatives depend on your income, then the answer is yes – you probably do want life insurance.” (Source: Money Advice Service)
What is life insurance?
Life insurance is term-based cover, meaning a payout can be claimed, but only if the policyholder dies during the set term of the policy.
In other words, life insurance provides a cash lump sum payment to a designated person/s, if you pass away during the time you’re insured.
This money can be used to cover mortgage repayments, child-care costs, school fees or future living costs if you were no longer around.
With life insurance, you choose how long you need cover for. In order to benefit from this protection, you pay a monthly premium.
Many people take out life insurance over a 15-25-year term to cover a mortgage debt or protect children until they’re financially independent.
However, this does mean that a payout is not guaranteed as the policyholder could outlive the policy.
Life insurance is a way of providing for your family’s financial future after you have passed…11.1m households in the UK have mortgages…£4,100 is the average funeral cost…£120,000 average outstanding mortgage debt.” (Source: The Finder)
Life insurance comes in 2 main forms, level and decreasing term. Level term provides a fixed payout amount, whereas a decreasing term payout reduces over time and is usually used to cover a repayment mortgage.
What is family income benefit?
Family Income Benefit is an alternative type of life insurance that pays loved ones a monthly tax-free income, instead of a lump sum.
Similar to life insurance, the policyholder chooses how long they want cover for. If the policyholder dies during this period, their loved ones would receive monthly payments over the remaining years.
For example, if you took out a 20-year FIB policy and died 3 years into it, payments would continue for the next 17 years.
This sort of product is often thought to be suitable for young families as it can be affordable and may offer the right level of essential cover. A policy may, for example, be set up to run until the youngest child would be expected to finish education and be ready to fully support themselves.” (Source: GoCompare)
Can I take out both?
Budget permitting, yes! Some opt to take out life insurance to clear significant debts like a mortgage, while FIB covers day-to-day living costs. Effectively replacing a lost income.
How much does it cost?
The premiums for both FIB and life insurance are generally fixed throughout the policy term. However, decreasing term insurance and FIB are usually cheaper than level term insurance. This is because with these policies the longer you live, the less the insurer has to pay out.
Many family income benefit providers also include critical illness cover which means that the policy would pay-out if the policyholder was diagnosed with a serious illness. In this case, premiums are higher.
Why do I need life insurance or FIB?
As a parent, you need to ensure that your little ones are looked after if the worst were to happen.
- Would you be able to make your mortgage repayments? – Average mortgage debt in the UK £121,687 (Source: The Money Charity)
- What about day-to-day living costs, existing credit cards or loans? – Average cost of raising a child in the UK £231,713 (Source: The Money Charity)
- If you had to return to work, who would look after the children?
- Could you afford expense childcare fees? – Average full-time nursery fees £232.84 per week or in London £305.92! (Source: The Money Advice Service)
“You can’t rely on the government to take care of your family. If you want to provide for your family financially, think about getting life insurance.” (Source: Money Advice Service)
The type of policy that you choose will depend on what it is you want to protect, your age and budget. However, both have a number of benefits and disadvantages.
Life insurance advantages
- Loved ones will receive a lump sum of cash if the policyholder dies during the policy
- It can be used to clear a mortgage or to provide an inheritance
- Could be used to cover bills, child-care costs or school fees
- You can set the term to last until children are independent or the mortgage is paid off.
Life insurance disadvantages
- If you live past the policy, you will not receive a payout
- Level term premiums can be more expensive
Family income benefit advantages
- It pays out a regular, tax-free monthly income to cover family living costs
- Monthly income means your loved ones don’t need to manage or invest large sums
- Regular payments can be used to replace a salary
- It can be a cost-effective option.
Family income benefit disadvantages
- If no claim is made during the policy, no pay-out will be received
- If the policyholder died a year before the end of the policy then the policy would only pay out for one year
- You may need significant funds to cover costs like funeral expenses.
If you’re looking to buy life insurance or a family income benefit plan remember to compare quotes as prices can vary wildly.
You can do this yourself or use the free services of a FCA registered broker, like Reassured, saving you time and more importantly money.