Essential Recipes: Life Cover

Your Co.mmerce

This episode of the Your Recipe for Financial Success podcast was published on 3rd December 2020. You can listen again by heading to our Episodes page, or on your favourite podcast player.

In this episode, Becky, Emma and Julie are whipping up all the ingredients that you need to put Life Cover in place.

Episode Highlights

Life Cover is an important but often overlooked ingredient in the cake of financial security. Now, we understand that no one really wants to think about their unexpected death, but it’s so important for those you would leave behind.

There’s no doubt that you would want your family or financial dependents to continue enjoying a lifestyle you are used to. If you don’t have Life Cover in place, however, they could be left struggling.

Why do you need Life Cover?

As we have just touched upon, you don’t want to leave anyone in a sticky situation once you have baked your last cake, if you catch our drift. Your family will no longer be receiving the income you bring in every month and so may find it more difficult to make ends meet.

There are three Ds to remember when thinking about putting Life Cover in place:

  • Debt
  • Dependents
  • Death duties

Having Life Cover in place will make sure all of the above financial liabilities are taken care of. In addition, your family will still be able to live a comfortable life.

How does Life cover work?

Life Cover pays out a sum of money when you die. This money can be used by your family to:

  • Pay off your mortgage and other debts
  • Supporting your children or other financial dependents
  • Covering Inheritance Tax (IHT) liabilities
  • Paying for your funeral

How much cover do you need?

The amount of cover you need in place completely depends on your situation, and what you are hoping to cover when you are gone. For example, you may want to make sure your children are financially comfortable until they are 25. If they are 10 years old now and you want them to receive £20,000 a year, you will need to have 15 years worth of cover at £20,000 a year to see them through.

Maybe you want to make sure your partner can pay the mortgage off. In which case, you should organise cover for the remaining balance.

Or, if you don’t want your family to have to pay for your funeral, that could be the level of cover you are looking for. To give you a starting off point, the average funeral currently costs £4,267.

How long should your cover last?

Again, this depends on what the payout would be covering. In the mortgage example, if you have 25 years left on your mortgage it makes sense for your cover to last that long too.

It’s important to realise here, if you survive your Life Cover policy, you will not get anything back from it.

Types of Life Cover policies

There are a range of policies to suit, including:

  • Single life policies
  • Joint life policies. With these types of policies you can choose whether the sum pays out on the death of the first person (helpful for covering the mortgage) or on the second death (ideal for covering IHT liabilities)
  • Level amount policies. These would pay the same lump sum no matter at which point in your term you pass away. It’s important to realise this type is affected by inflation.
  • Index linked policies. These go up in value in over the period of time.
  • Decreasing term policies. These reduce in value over your policy term. These are a good option if you want it to pay off a mortgage.

It is possible to tag on cover, such as Critical Illness cover, which would pay an additional sum on diagnosis of a listed illness.

How to find Life Cover

First of all, you will need to work out how much cover you will need. Aviva’s Life Cover Calculator is a great place to start if you are unsure.

Once you know the level of cover you would like, you can head online to comparison sites, or directly to your preferred supplier.

If you are still a little unsure about the level or type of cover you need, it’s a good idea to speak to a financial adviser. They can find out exactly the cover you need and then research the whole market for you – they may even find some great offers you could take advantage of.

We hope you are now full up on everything you need to know about Life Cover! If it’s left you hungry for more, check out our other podcasts on our episodes page. Don’t forget about our Facebook page too where you can ask questions and join in discussions about all of our topics!