If you look at the statistics, you might conclude that life insurance is not worth it. According to Finder, around 60% of people in the UK don’t have life insurance. But just because the majority doesn’t have life insurance, it doesn’t make it obsolete. The truth is that there are pros and cons to getting life insurance. Before you make a decision, you should understand what the benefits and drawbacks are. But you also need to understand what life insurance is all about.
The basics of life insurance
When you get life insurance, you are buying financial cover that pays out after you die. You generally make regular instalments, with the life insurance paying your chosen dependents either a lump sum or regular payments after you die. The amount of money your life insurance pays depends on the level of cover you buy.
There are two main types of life insurance to choose from:
- Term life insurance policies run for a fixed period. This could range from 5 to over 25 years. These only pay if you die when the policy is in place.
- A whole life policy will pay no matter when you die as long as you make your premium payments.
What are the pros and cons?
The pros of having life insurance
Let’s start with the potential benefits of life insurance.
Peace of mind
The most significant benefit to many is the peace of mind you get with life insurance. You know you are investing in making life more bearable, at least financially, for your loved ones if you die. Dealing with the death of a loved one is always hard, but with life insurance, you can make it easier by ensuring those you leave behind won’t suffer financially.
Limited financial impact of your death
Your death could have a significant financial impact on your loved ones. If you have a partner and children, then your death could lead to a loss in income. If your family suddenly doesn’t have the same income streaming in, they could have problems paying bills. Life insurance can reduce the financial impact your death could have. With it, your family can keep paying bills.
Reduced tax bill
Your life insurance payouts tend to be tax-free when it comes to income or capital gains tax. While you might have to pay inheritance tax on the payments, you could avoid those as well with careful tax planning. Writing your life insurance policy in a trust would ensure the payment is not considered part of your estate.
The cons of getting life insurance
There are potential drawbacks to having life insurance.
Life insurance typically only covers your death. It won’t help in situations where you suddenly lost income because you have a terminal illness or disability. Some life insurance options have a terminal benefit – paying out on diagnosis of a terminal illness – but these are usually optional.
You will also find most life insurance policies come with exclusions. They don’t tend to payout if you die due to drug or alcohol abuse. You might also have to pay extra for the cover if you are a fan of extreme sports, such as paragliding. If you have a severe health problem when you take out the policy, your insurance might exclude any cause of death related to that illness. Again, extra cover is often available but with an additional price tag.
Most things in life are not cheap, of course. It’s also possible to find cheap life insurance. The benefits can justify the cost to many. Price alone shouldn’t be a deterrent.
However, your policy’s price tag can be expensive in some instances, and it's important to acknowledge that. The cost tends to go up as you age. Your lifestyle choices also impact premiums. If you smoke, drink a lot of alcohol, and are overweight, then you could end up paying a lot more for a policy.
Paying for ‘nothing’
The final drawback only applies to fixed-term life insurance policies, but it is worth mentioning. If you take out a fixed-term policy and are still alive at the end of it, you won't receive anything. If you took out a 25-year policy when you were 50 and are still going strong at 76, your policy relapses. Therefore, you might have been better off investing the money in a fund that would keep growing until you take it out.
Do you really need life insurance?
What the above shows is that there is no clear answer to the question 'is life insurance really worth it?' There are obvious pros and cons to having it, and much of it depends on your situation.
Generally, life insurance can be a good idea if:
- You have young children or other people dependent on your financial contributions
- Your family lives in a house with a mortgage you pay
- You want to help your loved ones financially after your death and you can afford to buy life insurance
On the other hand, you might not find life insurance attractive if:
- You are single
- Your partner earns enough to cover all expenses
- You are on a low income and can’t afford to buy life insurance
It’s a good idea to consider each of the benefits above and think whether it would apply to your situation. Then look at the cons and how relevant they are to you. You can find more tips on how to choose life insurance from our previous guide.
Additionally, a SunLife spokesperson told Pension Times: “Term life insurance tends to offer bigger payouts if you die within the set term (to cover things like mortgages), but if you outlive that term you will receive nothing. Whole of life insurance, on the other hand, usually has a smaller payout because it guarantees to pay out whenever you die (as long as all the premiums have been paid). Over 50s life insurance is a type of whole of life policy which typically pays out between £1,000 and £20,000 depending on your policy details and provider.
“Over 50s life insurance payouts are often used towards funeral costs. Our latest Cost of Dying report showed the average cost of a funeral in 2021 was £4,056, which can be a lot of money for a family to find at short notice. One of the benefits of life insurance is that the money can usually be paid out quickly to cover time-sensitive costs like this, whereas it can take a long time for money tied up in the deceased's estate to be released to family. At SunLife, for example, we pay 98% of claims within 3 days.“
If you are still unsure about the usefulness of life insurance, you can get expert advice. An independent financial advisor could help you look at the different options and alternatives to life insurance. Comparing different options is especially crucial if you decide to take life insurance. It allows you to find the best policy for your life and financial situation.