Benjamin Franklin said “The only things certain in life are death and taxes.” This article discusses the most common reasons to take out Life Insurance to protect your family in the event of your early death.
Mortgages and Debts
Many people have a mortgage, other debts or both. On the death of the person owing money, the debt does not go away. It still needs to be repaid, so any surviving members of the family of the person who dies will need to be able to repay that debt. Life Insurance will pay a lump sum on the insured person’s death that will allow the debt(s) to be repaid.
Until the late 1990s, in the UK, it was common place to have a condition requiring the borrower(s) to have a Life Insurance policy that was assigned (signed over) to the mortgage company so that the mortgage could be repaid in the event of death.
If you do not have a Life Insurance policy to cover your debts, it may be necessary for your surviving family to have to sell the house.
When thinking of family protection, it is appropriate to consider the financial consequences of your death on your partner. If you are the only or main income earner, how would your partner or family survive financially if you were to die?
Would your partner have to go out to work? If the answer is yes, and you do not want them to (especially if you have a family) then you need Life Insurance. By providing a sufficiently large sum of capital on your death, they should be able continue to enjoy the lifestyle they currently have without any worries.
The amount of Life Insurance cover you will need depends on your circumstances, but a quick calculation of the amount of income they will need times the number of years it is required will provide an approximate amount of Life Insurance you should have.
When thinking of family protection, if you have children who want to go to university or other forms of Further Education, how will they be able to afford it without accumulating significant amounts of debt? Life Insurance can help ease this burden on your family.
The most basic funeral in the UK will cost around £4,000 (2012 figures). Do you have enough savings to be able to cover these costs? If the answer is no, it is probable that you may need to think about having some Life Insurance, otherwise your surviving family will have to find the money from somewhere.
Key Person in companies
If you own or hold a senior position in a company, what would happen to the company if you die?
Life Insurance can be used to provide some financial protection to the company, allowing it to recruit and train a new person to take up the position you hold. It also allows the company to absorb any loss of business because of your death. In these circumstances it will be the company that buys the Life Insurance with you as the insured person.
This article is for guidance only and must not be construed as advice. The contents of this article are aimed at the UK market, although many countries will have similar policies available. If you need advice you should refer to a Financial Adviser.