Moneytree Wealth Management

Life Insurance: How much is it and is it worth it?

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Life insurance is a type of policy that can protect your loved ones financially in the event of your death. There’s nothing quite like a pandemic to question our own mortality, and beyond will creation, life insurance is a way to hedge against such a possibility.

Insurance is an important aspect of personal wealth management, but what exactly does life insurance cover? Here are some things that life insurance can cover, but doesn’t always:

  • Paying off your mortgage
  • Paying off debts such as credit cards and loans
  • Support your partner
  • Looking after children
  • Covering funeral costs

How much does life insurance cost?

The bullet points above are the largest factors in determining the cost of your life insurance. If you want your policy to cover your mortgage, then you must state how much is currently left on the mortgage, along with debts, how many children, and so on.

Other factors will also affect your health insurance premium, such as age, health history, family health history, and occupation. Furthermore, whether you smoke and what hobbies you enjoy are often contributing factors too. After all, the risk of death (and thus a payout) is higher for an avid rock climber who works on oil rigs than a nurse who enjoys going to the gym.

The average life insurance in the UK costs between £13 and £30. In fact, according to Money Super Market Data from June to August 2021, the following numbers were the average monthly cost (not including critical illness cover) categorised by age:

  • 18 to 29 — £13.24
  • 30 to 39 — £21.03
  • 40 to 49 — £29.79
  • 50 to 59 — £34.10

The three types of life insurance

There are of course online calculators for a quick quote. However, the payout numbers above won’t be overly accurate because not only do we all deviate from the mean in one way or another, but there are three different types of life insurance: term life insurance and whole life insurance, and the former can be broken down into two subcategories: level and decreasing.

Level term life insurance

This is the simplest type of life insurance, in which the amount of cover you receive remains linear and the same across the agreed policy length (which can expire before you die). Presuming you die within the terms of the policy, your loved ones will receive a fixed amount of money. For example, if £60,000 is to be paid out, and it doesn’t matter if you die in five years or twenty years, as long as the policy has yet expired your family will be paid out the £60,000

The advantage of this type is that premiums and payout are fixed, meaning you can plan and be certain of your future, which brings a lot of peace of mind. However, such fixed premiums can be more costly, and the payouts do not increase in line with inflation. Furthermore, there are zero payouts if you die after the policy term.

Decreasing term life insurance

Decreasing term life insurance is essentially where the payout amount you could receive decreases over the length of the policy. But, like mortgages and other debts that decrease over time, this is suited to those situations; it can mean higher payouts if you were to die now, but less money for your dependents if you was to die in 15 years’ time.

Our finances, and in particular our debt, inevitably change over time. This type of insurance is therefore more in line with most people’s reality of declining debts, and therefore the premiums are cheaper because of this. In other words, you’re not overpaying for excessive cover.

Of course, this is bad news in some scenarios in which significant financial support is always going to be required. Plus, it sometimes only covers a mortgage and not things like funeral costs and general financial support to children.

Whole life insurance

Whole life insurance is essentially a permanent life insurance. It never expires unlike term life insurance, and it usually involves providing cash value upon dying. This is more similar to the level term insurance, but there is no term expiry, making this the most expensive option. The other key difference is that it has an investment aspect called a ‘cash-value account’. A percentage of your premiums are paid into here, which grows over time, and you can borrow against the account - or surrender the policy for cash.

Average UK payout

There is a common myth that only 80% of claims are paid out in the UK. In fact, four out of five people believe this myth. The truth is that around 98% of UK life insurance claims result in a payout.

The average payout on term life insurance policies in the UK is almost £80,000.

What is covered by life insurance?

Generally, dying of a natural cause during your policy is required for a payout. Cancer, stroke, cardiovascular disease, and respiratory conditions all generally apply, too. What isn’t usually covered is drug and alcohol abuse, high-risk activities, or if you’ve had a critical illness or disability during your lifetime.

Is life insurance worth it?

Insurers reliably receive more money in premiums than they pay out, on average, to remain profitable. So, statistically, the average person is likely to pay in more than they get out, but this isn’t the point of insurance. The point is that it’s a hedge against the worst-case scenario, and if your family is likely to financially struggle due to your death, then it’s often worth considering. However, if you have savings in the bank and manageable liabilities, it may be wise to avoid the premiums.

Alternatives to life insurance: Search for a financial advisor near you

One possible alternative is to plan for the liquidation of the family home in order to bring in quick cash (or equity release), or simply purchase mortgage protection insurance, which is usually cheaper than life insurance.

Another alternative is to purchase critical illness cover, which provides lump-sum payments in the event of becoming critically ill (and thus cannot work) - in this scenario, life insurance wouldn’t pay out, or if it did, it wouldn’t pay out until you die. Finally, income protection insurance can be a highly versatile option, which pays monthly income if you’re forced to stop working for health reasons.

If you’re debating whether or not life insurance is suitable for your situation, feel free to contact a Moneytree Wealth Advisor here. At Moneytree Wealth Management, we offer advice and guidance on life insurance, estate planning, and personal wealth management.

Estate planning is not regulated by the Financial Conduct Authority

Amy Smith

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