What is family life insurance?

Family life insurance is essentially life insurance taken out by a parent to provide financial support for their family, should they die. Family life insurance isn’t one specific policy, but a collection of different types of life insurance that can protect your family financially should you die. This can be used to help replace their lost income and/or pay off large debts, such as a mortgage.

Do I need family life insurance?

While the average nuclear UK family used to be defined as having two adults and 2.4 children, things could not be more different today. 

We are now an eclectic mix of two parent families and single parent families, extended families and blended families. And the one thing all families have in common is that they involve adults living with and caring for children.

While no one likes to think of dying and leaving their family behind, it is important to consider what would happen to your loved ones if you were no longer here. Would they be able to cover the bills, mortgage, or living expenses without your income?

Life insurance for parents

Taking out family life insurance is one way a parent can help provide for their family when they die. 

There are a few different types of life insurance to choose from, and the best cover for you will depend upon your particular circumstances:

Types of life insurance available to families

Level term life insurance

The simplest is level term insurance (sometimes known as term life insurance). 

In this case you simply choose the amount you wish to be insured for and the number of years (the term) you would like the cover to last. You pay a small premium every month and should you die during the term, the insurance company will pay your beneficiaries the lump sum in cash. 

With level term insurance, both the premium and the payout remain the same for the whole of the term, provided you abide by the terms and conditions. 

So, if you were insured for £250,000 over a 20 year term, your family would receive this sum whether you died in 6 months’ time or 19 years’ time.

Unsurprisingly, you’ll pay more if you require more cover over a longer period. And at the end of the term your life insurance policy will end, as will your monthly premiums.

Decreasing term insurance

Decreasing term life insurance, also known as mortgage life insurance, will gradually reduce the cash sum paid out upon your death, over the term of the policy. This is typically used to cover a debt that reduces over time, such as a repayment mortgage. 

In this case the monthly payments stay the same, while the payout decreases over time. The monthly premiums are typically around 20% lower than level term premiums, due to the fact the payout gets smaller, making this a cheaper option than level term insurance. 

Decreasing term policies can suit those whose main concern is to pay off the mortgage. However, as the cash payment is earmarked to pay off your mortgage, this means your dependants won’t be left with a lump sum to help with other living expenses.

Whole of life insurance (family whole of life insurance)

If you would prefer life insurance that covers you until you die, a whole of life insurance policy could fit the bill. 

Like term-based types of life insurance, you pay monthly premiums for your cover, and the insurer will pay a cash lump sum to your dependants when you die. However, whole of life policies do not specify a term and thus protect you until you die.

Whole of life policies are guaranteed to pay out, which makes them more expensive for insurers to offer. As a result, you can expect pricier monthly premiums. 

Some types of whole of life policies invest your premiums. However, should the investment do badly, you may be asked to increase your premiums or accept a smaller lump sum. 

Happily, many whole of life policies do not actually require you to pay your premiums until you die. Instead, you pay for a certain number of years, or until you reach a certain age (typically 90). After this point your cover continues, but you make no further payments. 

Whole of life policies can suit those who would like lifetime cover, and don’t mind paying for it.

Family income benefit insurance (FIB)

An alternative to family life insurance is Family income benefit (FIB) insurance. 

Rather than paying out a lump sum upon your death, FIB will pay your family a monthly income for a set period,  allowing them to cover their bills and mortgage payments.

You simply specify how much you would like your family to receive each month (e.g. £2,000) and the term (e.g. 30 years) and the insurer will calculate your monthly premiums. 

When you start paying the premiums, your term begins. 

So, if you died in Year 1 of the 30 year term, your family would receive £2,000 a month for the full 30 years.

If you died in Year 26, your family would receive £2,000 a month for the remaining 4 years. Once the term ends, so does your cover (and your premiums).

Family income benefit premiums tend to be cheaper than those for life insurance, as insurers do not need to pay out a large lump sum if you die. Even if you died early on in the policy, the insurer would still be spreading out the payment over many years.

It is also possible to set up a joint, family income benefit policy. While this would cover both parents, it would only pay out once, after the first parent dies (provided this was during the term of the policy). For this reason, setting up separate FIB policies rather than one joint policy may be better, as it would avoid leaving one parent without cover.

FIB policies can be set up to last as long as you need them; for example, until the children have finished full time education, or right up to retirement. 

As the monthly premiums are cheaper, FIB policies are a good choice if you are on a tight budget and are happy with a regular income payout, rather than a lump sum. 

If you would prefer to be able to pay off the mortgage for your family, a level term life or a whole of life insurance policy would be a better option.

Free family life insurance

There are also a couple of ways in which you could get family life insurance for free.

Firstly, many employers offer life insurance to employees as part of their benefit packages. 

Alternatively, you may have death in service benefit which pays a lump sum to your family, should you die while an employee. This is typically calculated as a multiple of your salary. For example, if you earn £25,000 a year and you have death in service benefit worth 4 times your salary, you would be covered for £100,000.

Free life insurance for parents

Secondly, if you have a baby or child under 4, you may be entitled to a year’s worth of free life insurance. 

Some insurers, including the Post Office and Aviva, offer free Parent life cover. This is a £15,000, level term life insurance policy which will be paid to your family if you pass away within one year. 

Parent life cover must be applied for before the child turns 4, and both parents can apply for separate cover. What’s more, you can apply for up to 8 children.

While £15,000 per child is clearly not enough life cover for a parent, it can be a welcome added bonus.

What is life insurance for children?

It is also possible to take out life insurance for kids.

Children can be added to a parent’s level term life insurance policy, which is known as ‘rider’ insurance. This means you would receive a lump sum if they were to die before you (up to a set age). This will increase the cost of your premiums, but is the simplest way to provide cover for a child.

Alternatively, you can take out level term life insurance for your children in their own names. Child life insurance will pay out a lump sum if your child dies or is diagnosed with a specified serious illness or condition during the policy’s term. This can be used to help family finances at a difficult time, or to pay for medical treatment.

You can even take out baby life insurance, which essentially gives a child whole of life cover, although this type of policy is unusual and expensive.

Making a claim on a child’s life insurance policy is rare and the premiums can be costly, so think carefully before taking one out.

Life insurance for mums and dads

It is an interesting fact that some families choose to only take out life insurance for the main breadwinner in the family. They do not see any reason to insure the life of a stay at home mum or dad, as they have no earned income to be lost. 

However, this can be a terrible mistake. Legal & General’s 2015 Value of a parent survey revealed that the actual value of unpaid work that a stay at home mum does is estimated to be a whopping £29,535 each year. 

Life insurance for dads and mums who stay at home should therefore be deemed just as important as working parents. After all, could you cope with working and childcare, should your partner die?

Inheritance tax (IHT)

Whichever type of life insurance you choose, it is worth remembering that a large proportion of the payout can be swiped by inheritance tax, when you die.

Fortunately, with a little prior tax planning you can reduce or even prevent any of your life insurance being taken by the taxman.

Keep your cover up to date

With most life insurance policies lasting between 10-50 years, you’re bound to have a few lifestyle changes. You may move job and be offered better life cover, have another child or move house and increase your mortgage. 

All of these factors can influence the amount of cover you need, which makes re-assessing your cover from time to time a good habit to get into.

What happens if your life insurance provider collapses?

Finally, with the COVID-19 pandemic causing many companies to struggle or even collapse, you may be concerned about taking out such a long insurance policy. What if the insurer collapses in the next 20 years?

Thankfully, protection is available. The Financial Services Compensation Scheme (FSCS) that protects UK bank accounts covers life insurance policies, too. 

Check the Financial Services Register to ensure your insurer is listed.

21st August 2020