Should I take out life insurance if I'm single?
Life insurance is not just for people who get married and have children: there are good reasons to take out cover even if you're single.
Having a life policy in place in case you die can help your family deal with your debts — such as mortgages and credit cards — if the worst happens to you.
Life cover is most commonly taken out to cover mortgage debts: typically a policy will be set up to pay out a lump sum, equivalent to the home loan, on the event of the policyholder’s death.
If you live with a partner or have children, the cover may be extended to provide an income that your dependants can use to pay for living expenses.
For single people, this extra protection is unlikely to be necessary: but taking out insurance that covers the mortgage can be a good idea.
If an individual dies before their mortgage is paid off, their bank or building society can seek repayment of the loan from their late customer’s estate — this is their collected assets.
This may require the property to be sold to pay off the mortgage.
But if the home is in negative equity — where the property is worth less than the outstanding loan balance — the lender has the right to demand that the difference is also made up from the estate.
(If there is not enough money in the estate to repay the mortgage, the lender can demand that the property is sold. But it can not pursue surviving family members to make up any shortfall.)
To make matters worse, if the probate process — during which the individual’s estate is dealt with — is drawn out, the lender can continue to add interest charges, increasing the total bill.
A life insurance policy will ensure these problems do not arise.
Life insurance likely to be less important to you if you don’t have a mortgage.
However, debts such as unsecured loans and credit cards are treated in the same way as the mortgage, in that they must be paid off out of the deceased person’s estate.
If you have borrowed a lot of money on this basis, you may consider taking out a life policy to ensure they can be repaid.
Student loans, on the other hand, are cancelled on the borrower’s death under current rules.
Get cheaper life insurance while you can
Another reason to consider taking out a life policy even if you are single is because the premiums are likely to be cheaper than if you sign up in a few years’ time.
Generally, the younger you are, the lower life premiums you face, because there is less risk of you dying.
If you think you might want to sign up for life cover at some point in the near future, for example if you plan to buy your first home or get married soon, it could make financial sense to do so now rather than waiting.
Leaving an inheritance
Although protecting a mortgage or providing for a young family may not be a concern for older people or pensioners, life insurance can help ensure that individuals can leave an inheritance to their families.
Traditionally, property has been a major source of most inheritances, but older people are increasingly using the equity tied up in their homes to boost pensions or to pay for long-term care.
A life insurance policy means that an inheritance can be left to children or grandchildren, for example, irrespective of whether there is any equity left in the home.
If you are setting up a life policy with the intention of it paying out an inheritance, you should consider writing it in trust.
This means the cover is ring-fenced outside the rest of your assets, such as savings, investments and property. As such, payments from the policy are not included in your estate for inheritance tax purposes.
And because the life policy is not included in your estate, the payout does not have to go through the probate process with the rest of your assets, which means your family will probably get the money much more quickly.
A trust is normally simple and cheap (or even free) to set up: talk to your insurer when you take out your policy, but bear in mind that a trust is not appropriate in all circumstances.