A life insurance payout can help the people you choose manage financial commitments after your death, if a valid claim is made under the policy. How it is used depends on the type of cover, who receives the money, any trust or beneficiary arrangements, and your family’s circumstances. Here are seven practical needs to consider when planning cover.
1. Mortgage or other borrowing
People who share a mortgage or other commitments may need a way to meet payments after losing an income. A suitable life policy could provide funds towards a mortgage or other debts. Decreasing-term cover is often considered alongside a repayment mortgage, but the policy amount and term should be checked against the actual borrowing and the people who would receive the benefit.
2. Funeral costs
Funeral arrangements can create costs at a difficult time. A payout may help with those costs, although access to the money and the timing of a claim matter. Consider what other savings or arrangements are already available.
3. Income for dependants
If someone relies on your earnings, think about how long they would need support and what other income or benefits they could receive. A lump-sum policy and family income benefit work differently: the latter is designed to pay an income for the remaining policy term following a valid claim. An adviser can explain the options and limitations.
4. Everyday living costs
Housing, utilities, childcare and other regular expenses may continue after a death. Cover can be considered in the context of those costs, existing savings, workplace benefits and any other protection. A payout is not a guarantee that every future expense will be met.
5. A legacy for people or causes you care about
Some people want to leave financial support for children, relatives or a charity. The recipient of a life policy and the way any benefit is held should match your wishes. If you are considering a trust or arrangements for a child, seek appropriate legal advice.
6. A possible Inheritance Tax liability
Life cover is sometimes considered as part of estate planning, but Inheritance Tax depends on the estate, exemptions and law in force at the time. A policy is not automatically outside the estate, and a trust is not automatically suitable. Speak with a qualified tax or legal adviser before relying on life cover for this purpose.
7. Care for a pet
If someone else would care for your pet, you may want to think about the likely ongoing costs and whether you wish to provide funds for that person. Make sure your wishes are clear in the appropriate estate documents; a life policy on its own does not appoint a carer.
Plan around your own circumstances
The right amount and type of cover depend on the people you want to support, your commitments, existing protection, budget and insurer terms. Read our Life Insurance guide and Planning Guide, or start a no-obligation adviser enquiry. This enquiry does not produce an instant online price; an adviser can discuss the available options with you.
Further independent background: MoneyHelper’s life insurance guide.
