Life insurance is designed to provide financial protection for the people who depend on you. But as life changes, the level of cover you need can change too.
Here, Alex Hollingshead explains the key life events that should prompt a review of your life insurance – and why it’s important to make sure your policy still reflects your circumstances.
This article is from the Good Guide to Life Insurance, which you can download for free. Protection is a crucial safety net for your family, but it needs updating as your life changes.
According to a study by Direct Line, only 35 per cent of adults in the UK have life insurance, despite its importance in providing for their families. This translates to roughly 18.8 million people. Even if you are one of these 35 per cent, it’s also
important to review your policy on a regular basis or after a significant life event.
What are life events?
When we think about life insurance, it’s important to remember that the proceeds are for our loved ones. A life event in the context of life insurance refers to a significant catalyst in your life that can affect their financial situation.
Examples include:
1. Having children: Losing half the available income in case of an untimely death could leave the surviving spouse struggling to make ends meet. In fact, 7 in 10 households say they’d have trouble covering everyday living expenses within just months of losing their primary wage earner.
2. Buying a home: Paying off a mortgage is one of the main reasons people buy life insurance. To help keep the people you love in the home they love, you can buy enough life insurance to completely cover that debt.
3. Paying off your mortgage: Decreasing insurance policies are set up to finish around the same time a mortgage is due to be paid off and lapse automatically. If affordable, you may look to put a level term assurance policy in place rather than a decreasing policy. A level term policy can provide a sum assured even after the mortgage is paid off.
4. Divorce: It is important to revisit existing life insurance policies after divorce. Where partners have separated with children, the sum assured provided by a pre-existing contract may still be intended to be left to cover childcare, school fees or to leave a nest egg. The complications occur when deciding who pays the premiums and for how long.
5. Retiring: Upon retirement, you may lose death in service or relevant life benefits provided by your employer. If there is still a need for life insurance after retirement it is important to consult a financial planner as to what your options may be. If older at retirement premiums may be significantly more expensive and cover may have to be reduced to keep premiums affordable.
What constitutes a change in circumstances?
Changes in circumstances relate to events that may give rise to a policy adjustment. For instance, buying a more expensive property may mean that your current decreasing insurance policy will not cover the new mortgage amount in its entirety.
Having children may increase the cover needed and most likely the monthly premium.
As life insurance is medically underwritten, changes to your health status may adjust the premium. For instance, quitting smoking may reduce your premium.
In all occurrences, it’s best to check with the insurer or your financial planner.
Should you review your insurance annually?
In short, yes. Checking outstanding policies is always prudent even if the insurance has been taken out to cover the long term.
Is it worth switching providers?
An annual review of your policy may show that switching providers could result in a cheaper monthly premium. However, there are many potential drawbacks of switching providers. A conversation with your financial planner is recommended.
It’s important to make sure when shopping around that the new insurance policy reflects the same terms as the previous policy. It’s also worth noting that changing providers will result in a new two-year contestability period meaning that if the provider discovers any inaccuracies in the information provided, cover may be denied.
