Becoming a parent is an important time to consider life insurance, or to assess whether your existing cover is sufficient.
When you have children, the financial consequences of one parent dying are likely to be severe. Indeed, the cost of raising a child in the UK stacks up to a whopping £230,000.
That’s why setting up a life insurance policy should be near the top of prospective or new parents’ to-do lists.
Costs for new parents to consider
Do you know how these will be paid for in your absence?
Mortgage: As the main expense of most households, it’s worth re-evaluating whether you’ve enough protection in place to cover repayments.
Childcare: You’re not only providing financial support, but also carrying out unpaid responsibilities looking after your child. Your partner could be left with expensive childcare costs should you die.
Education: Whether it’s school fees, uniforms and sports kit, or university tuition fees, you may want to ensure your offspring’s costs are covered.
Loans and savings: There may be other loans or credit cards which you don’t want to leave your loved ones to pay off. You may also want to ensure regular payments into your child’s savings or trust fund are kept up.
General costs: Food, nappies, utilities, clothing… Things still need to be paid for to help the family maintain its current lifestyle.
Why life cover is important for families
A life insurance policy would be able to pay out a lump sum to the surviving spouse if a family breadwinner were to die.
In many cases, for example, this could make the difference between being able to stay in the family home, and having to sell up and move to cheaper accommodation.
Should both parents be covered?
It might seem sensible just to cover whichever parent is providing the main source of income for your family. For example, if one of you is working while the other stays at home to look after your children.
But think about the financial implications of the carer’s death. In a lot of cases this would force the breadwinner to give up work, at least to some extent, to look after the children.
And stay-at-home parents provide value beyond the time it takes to care for a child.
It’s worth weighing up the benefits of a joint policy against two single policies. While a joint policy could be cheaper than two single policies, it’ll only pay out once.
Two single policies offer twice as much cover, and may not be much more expensive than taking out a joint policy.
What types of cover are available?
Once you’ve decided to buy life cover, what type is the most suitable?
Decreasing term insurance (also known as mortgage life insurance) is usually the least expensive. The amount of cover reduces over the policy term, so it’s commonly used to cover a repayment mortgage.
You decide how many years you want to be covered, and the policy will pay out a lump sum if you die within the term. The amount of cover will fall as time passes, to reflect the fact that you’ll gradually be paying off your mortgage.
Level-term insurance promises to pay out the same amount of cover no matter when the policyholder dies (provided it’s within the term). But premiums will be higher as a result.
Whole-of-life policies will pay out regardless of when you die, unlike term policies which only pay out if you die before a chosen date. The cover they provide may be longer-lasting than term insurance, but this comes at a price.
You may decide to buy a policy that also offers insurance against a critical illness, such as some types of cancer or heart disease, which meant you were unable to work.
Adding critical illness to your life insurance policy may increase the size of your premiums considerably.
When you compare life insurance, try with critical illness cover and without to decide what best suits your needs.
Or you could choose a policy designed simply to pay off your mortgage if you or your partner died.
How much cover should you buy?
Factors which will determine the cost of your policy include the extent of your cover, and how long the policy runs for.
The amount you’re covered for should be based on the size of your mortgage and your family’s living expenses. If you’ve only recently taken out a mortgage and have yet to pay much of it off, this may be quite a large sum.
But even if you can’t afford to cover the whole amount, some life insurance is better than none.
The other decision is how long you should be covered for. If you’ve just had your first child, a term of 25 years would probably cover younger siblings as well until they reach university age.
In addition, if you take out a policy while you’re younger, premiums will be cheaper. And you’ll be able to lock in your monthly payments at a cheaper rate.
Parents of older children, who may also have less time to run on their mortgages, could reduce the term accordingly.
Read more about how much life insurance cover you might need.
There are a few other things that affect the price of cover. Your age and whether or not you smoke are both significant.
Your employer may already offer some form of life insurance, for example “death in service” benefit. However, bear in mind that if you change job, you may lose this benefit.
Having trouble working out how much life cover you’ll need?
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