When should you review your life insurance?
Life insurance is often arranged around a major event such as buying a home and then left untouched for years. But families, mortgages, incomes and responsibilities change and the cover originally purchased may no longer reflect what a household needs.
Life insurance has a straightforward purpose: providing financial protection if the person insured dies during the policy term.
The appropriate amount and type of protection is less straightforward.
A policy designed primarily around a mortgage, for example, may not address the wider financial impact of losing an income.
When the cheapest policy wasn't the important question
A couple in their mid-thirties approached the Clear Employee Benefits team after buying their first home.
They had two young children and already held a joint-life decreasing-term policy broadly designed around their mortgage.
Their initial question was whether the cover was competitively priced.
It was.
But reviewing what the policy would actually provide raised a more important question.
If either parent died, clearing the mortgage would undoubtedly help, but childcare, household bills and the costs of raising two children would continue while the household had also lost an income.
The structure was subsequently reviewed and separate protection was arranged around the family's wider requirements, including provision intended to support ongoing household income.
Five years later, the wife died aged 39.
The financial protection couldn't lessen the family's loss.
It could, however, reduce some of the financial decisions confronting the surviving parent.
The arrangements provided financial support towards the family's commitments and greater flexibility around work and childcare. The surviving partner's own individual protection also remained in place.
What does your life insurance actually need to do?
A useful protection review should start with the household rather than an insurance quote.
Questions might include:
- What debts would need repaying?
- What household income would be lost?
- Who is financially dependent on that income?
- How long is that dependency likely to continue?
- What ongoing childcare or other costs would remain?
- What protection already exists through employment?
- What savings or other assets are available?
Only after understanding those requirements does it make sense to consider the appropriate policy structure.
Different cover performs different jobs
Life insurance isn't a single product.
Depending on individual circumstances, options may include level-term insurance, decreasing-term insurance and family income benefit.
Whether couples arrange joint or separate policies can also affect how protection operates following a claim.
Trust arrangements may be another consideration.
The appropriate solution depends on the household and should not be assumed from price alone.
When should life insurance be reviewed?
Useful triggers include:
- having a child;
- buying or moving home;
- increasing borrowing;
- a significant change in income;
- marriage or separation;
- becoming self-employed; or
- taking responsibility for another financial dependant.
Even without a major life event, cover arranged many years ago may be worth revisiting.
The key question isn't simply “How much would the policy pay?”
It is “What would that money actually need to do?”
If your circumstances have changed significantly since your life insurance was arranged, the Clear Employee Benefits team can help you review your existing protection and understand the options available.
Contact ebenquiries@thecleargroup.com.
