Family life insurance

Family life insurance refers to any type of policy that provides financial support to the policyholder’s family members, should the policyholder die or become unable to work through illness or injury.

The payout of a family life insurance policy could be used for a number of things, from paying for your funeral or mortgage, to replacing your income or paying for your children’s university fees. This will all be determined by the type of family life insurance policy you decide to take out.

As family life insurance isn’t actually a type of insurance policy, but a branch term under which a number of policies fall, how your policy works depends on the type of cover you have.

When taking out a life insurance policy for your family, you will be given options on the type of insurance you want, the length of your insurance term, and how much cover you want.

Typically, your life insurance policy will only pay out should you or your partner die within the terms of the policy, or in some cases if you become unfit to work thanks to a serious illness or injury. You will also have to keep making monthly payments to your insurer to maintain the validity of your policy.

When thinking about which type of life insurance will best suit you and your family, you need to consider what you want to get out of it. For example, if you have young children then you may want a policy that can cover your income until they’re 18. Or maybe you just want to make sure they’re not burdened by your mortgage or any other debts you may have.

The types of life insurance that will be most beneficial to families include:

Level term life insurance

This is one of the simplest types of life insurance, in which you agree to a fixed sum that your insurer will pay to your beneficiaries should you die within the pre-agreed term. The payout can either be paid as a lump sum or in instalments, also known as family income benefit.

Decreasing term life insurance

This works similarly to level term life insurance, with the only difference being that the total payout decreases the longer you are into your policy. These types of policy are typically taken out by people with outstanding mortgage payments or other forms of debt.

Whole of life insurance

This is one of the safest types of life insurance in that you are almost guaranteed a payout, although this type of cover is typically the most expensive. Whole of life insurance policies don’t have a term or end date, meaning they’ll pay out whenever you die should your claim be valid.

Joint life insurance

Couples often choose to open a joint life insurance policy that will cover both parties with a single pay out when the first partner dies. Such policies are often cheaper than taking out separate policies, but remember that your cover will end once one of the policyholders die, meaning you may have to get more insurance later on down the line.

Critical illness and terminal illness cover

Both critical illness and terminal illness cover are available as independent products or as add-ons to other family life insurance policies. They are similar in that both will pay out in the event that you contract a particular illness, or one of a list of particular illnesses, and are therefore no longer able to work and earn.

This type of cover, also known as income protection, can be particularly helpful if you are the main household earner and will help your family pay for any outstanding debts, keep up with day-to-day household expenses, and pay for any medical costs incurred as a result of your illness.

Writing a life insurance policy in trust

Another option if you want to maximise the benefits received by your children when you die is to put your life insurance pay-out in a trust. The money will remain in the trust, to be looked after by a trustee, until such time as the beneficiary (or beneficiaries) reaches a pre-determined age, usually 18 or 21.

One of the main benefits of doing this is that because the money goes directly into the trust on behalf of the beneficiary, it does not go into your legal estate and so does not count towards the inheritance tax threshold. Anything above the inheritance tax threshold of £325,000 will be taxed at 40% and so by writing your life insurance policy in trust, you could save your family a lot of money should the worst happen.

The cost of your family life insurance policy will depend on your health and age as well as, of course, the size of the pay-out you require and the length of the policy term.

If you are older or if you have any existing health problems (including any serious illnesses you’ve had in the past), your premiums will be more expensive.

The same goes if you regularly involve yourself in any dangerous activities either at work or in your leisure time. This includes smoking.

If you have a policy open and during its course you have another child, then you might want to consider changing the policy terms and the size of the pay out in order to accommodate for the increased financial needs of your family. This will again serve to increase the cost of your premiums but is often considered a necessary expense and rightly so.

Life insurance isn’t a one-fits-all type of policy, and not everyone will benefit from taking out family life insurance the same way. The types of people that will benefit the most from family life insurance, however, include:

• Families with young children: The younger your children are, the more likely they are to rely on your income. Don’t hesitate in taking out life insurance as parents if you’re worried about your children’s standard of living should you not be able to provide for them, especially if you’re a single parent.
• Families with teenage children: It’s not just parents of young children that should seriously consider life insurance. Policies can also help pay towards things like University fees or other educational costs.
• Families with a mortgage: If you’ve still got years left to pay on your mortgage, a family life insurance policy can cover this should you die, meaning your family won’t have their home taken away should they struggle to continue paying for it. This is also true for people with other forms of debt.

Again, this depends on your own personal circumstances and the exact need of your family members. People with massive amounts of debt or a huge mortgage to pay would need a larger payout than someone who just doesn’t want to burden their family with funeral costs.

In order to get the best policy with maximal benefits to your family at the lowest cost possible, you should make sure you compare available policies with Money Expert. 

Our life insurance comparison service will find you the best quotes on the market that suit your particular requirements at no extra cost to you so you can rest assured that your family get the pay-out they need at the best price possible.