Mind the life insurance gap

6 July 2018

Parents are being urged to consider life insurance after shocking new figures reveal that most families are unprotected should the worst happen

Less than a third of people in the UK (30%) have life insurance, which equates to 8.1 million households – significantly less than the country’s 11.1 million mortgaged properties.

Life insurance, which pays out a lump sum on death, can mean that if a family tragedy occurs the finances are taken care of.

Yet this lack of cover, revealed in a study by comparison website Comparethemarket.com, means a bereaved parent could be forced to sell the family home if they cannot afford the mortgage repayments.

Given that mortgage debt and unsecured debt, such as credit cards, currently averages £57,830 per person, many families would be in great financial difficulty should either parent die.

Surviving parents have also lost out on a government benefit paid to help raise children, following a cruel change in the rules made last year. Some are entitled to as much as £100,000 less in benefits to help raise their children as a single parent (see box below).

Mike Preston, the business development director at comparison website Compare Cover, says: “Losing a partner is life-changing and devastating. You have not only lost part of your family, but, thinking practically, you have also lost a member of your family team and someone who may have contributed financially to your household. That’s one of the reasons why it is increasingly important for people to consider protecting their family’s future finances by taking out life insurance.”

The facts

There are several variations on the kind of life cover you can buy. Level term insurance is the most widely known, where you simply select the amount of cover needed and the length of time the policy will run for, usually until the children have grown up and the mortgage is repaid. The policy will then pay out the sum insured if you die before the end of the term.

Alternatively, there is decreasing term insurance. Here, the sum insured reduces over the term of the policy – which means the premiums can be less than for a level term policy. This suits someone looking to clear a specific debt, such as a mortgage, that reduces over time.

Whole of life insurance cover, meanwhile, continues until the policyholder dies. Many people use this to cover smaller amounts such as funeral costs.

The average claim for a term life insurance policy in 2017 was £78,323, with 98% of claims being paid, according to the latest figures from trade body the Association of British Insurers.

The average payout on whole of life insurance was £4,511, with almost all (99.99%) of claims paid.

Finding cover

It is important to establish the level of cover you need. The basic rule is to have enough to pay off your outstanding debts, as well as setting aside a certain amount for dependants too.

It’s important to cover both parents – even if only one works.

Lisa Lloyd, wealth planner at investment manager Sanlam UK, says: “It’s easy to think the person staying at home looking after the kids doesn’t need life cover – after all, they’re not earning a salary.

“What most people forget is that their role has a currency, and if they were to die, then it would cost money to pay someone else to carry out those duties. For childcare, that can amount to a lot – around £25,000 a year for each child. In comparison, the cost is invaluable to insure and protect you and your family.”

Experts recommend that couples buy two single policies to make sure they are both covered, rather than a joint life policy.

Kevin Carr of financial services consultancy Carr Consulting and Communications says: “If anything happened to both lives, both policies would pay out, whereas a joint policy only pays out once. It also means the other life is still insured after a claim, whereas, because a joint policy would have paid out, it would leave the surviving partner uninsured.

“You can also be much more flexible with single life policies and have different amounts of cover and different terms. It’s not always the case that both lives should automatically have the same cover.”

What it costs

Premiums are calculated according to several factors, health being a key element.

A 40-year-old non-smoker in good health can lock into a premium of £8.78 a month for 25 years with insurer AIG, with a payout of £100,000 should they die. For a smoker, the premium on the same policy with AIG would double to £17.56.

Emma Thomson, head of customer care at broker LifeSearch, says: “Health issues aren’t quite black and white. But as a general guide, something like diabetes could increase the cost by 50% to 100% depending on the circumstances. In particular, the type of diabetes, height and weight, age, medication, amount of cover and overall health are all relevant, and often with conditions such as diabetes there can be other concerns, like a high body mass index.”

It’s also crucial to shop around, as there can be huge price differences between insurers.

For example, our 40-year-old non-smoker can get a £100,000 policy for 25 years, costing £8.78 a month with AIG. But at Old Mutual this same policy would cost almost 70% more, at £14.82 a month.

Getting covered

There are several ways to get cover. You can enlist the help of a professional, such as an insurance broker or financial adviser, or go it alone and find your own policy using a comparison website.

A Comparethemarket.com study shows that a quarter of people (25%) bought cover through a broker, and a similar figure (24%) through a mortgage provider, bank or building society. Only one in five (21%) said they chose their life insurance from a comparison site.

If you do choose to find cover yourself, remember to read the terms and conditions of the policy – and be completely honest about your medical history on your application form.

If you’ve never had any major medical issues and you aren’t a smoker, then the risk of you claiming on your life insurance policy will be much lower than someone with existing health problems. As a result, you may well be offered cover without having to take a medical.

If, however, you have disclosed any pre-existing conditions or a family history of hereditary diseases on your application form, you’ve been refused cover in the past or you’re looking to insure your life for a large amount, you may be referred for a medical.

Medicals for life insurance were previously conducted by a GP. But insurers are increasingly using nurses, who can offer quicker and more convenient appointments and come to your home.

Review life cover to make savings

If you already have life cover, you might be able to save money by switching to a newer policy. Over the last few decades the cost of life cover has typically fallen as life expectancy has increased.

You might also find a policy with improved terms by searching online or using a comparison website.

Comparethemarket.com’s life insurance study showed that of those people who have life cover in place already, 79% have never switched provider, meaning they could be paying over the odds without realising it.

Dan Hutson, head of life insurance at Comparethemarket.com, says: “It’s worth making sure you regularly review your policy. Although life insurance tends to get more expensive as you get older, making positive life changes, such as quitting smoking or losing weight, could potentially bring your premium down.”

Women more likely to be financially vulnerable

While three-quarters of women with children are in full or part-time work, their income is typically lower than that of their husband, particularly where they have reduced their hours to spend more time with their children or taken a pause in their career while their children are very young.

This means that should they suddenly lose their husband – and with that, a crucial income – there is a huge financial gap to plug.

The widowed parent’s allowance, a government benefit paid to bereaved mothers or fathers, previously went some way to plugging that gap.

Those bereaved before 6 April 2017 receive up to £113.70 a week (around £493 a month) until they are no longer entitled to child benefit, when the child is 16, or up to 20 if they are in education or training. There was also a one-off tax-free bereavement payment of £2,000.

But under rules introduced in April 2017, a surviving parent is now only entitled to a bereavement support payment – a lump sum of £3,500 followed by 18 monthly payments of £350, a total of just £9,800.

So for two people claiming maximum support in identical situations (the only difference being the date their spouse died), one of them could receive £100,000 less than the other over the course of their children’s upbringing.

Ben Brooks-Dutton, chair of Life Matters, a pressure group that was set up to raise awareness of the needs of grieving families, lost his wife in a car accident in 2012, when their son was just two.

Ben says: “These benefit cuts are callous and unnecessary. The idea that grief is finished after 18 months [– after which the payments cease –] is ludicrous. I had no idea about these benefits until this happened, but they really helped give me more time with my son when he needed me most.”

Ben highlights that women are likely to be more vulnerable to financial crisis should they lose their husband. “Women are more likely to have already reduced their working hours to raise their family, which means a reduced income,” he says. “Some will have stopped work altogether or at least paused their career and have no income at all.”

Charities, support groups and real people coping with the loss of a partner are involved with Life Matters, which has lobbied the government to reverse the cuts and improve the system.

Ben highlights that the bereavement support payment is not paid to the unmarried partners of those who have died. “Unmarried mothers will get nothing. This is something we are pushing for the government to change, as cohabiting households are the fastest growing family type in the UK at the moment.”

Ben concludes: “It’s crucial for all families to protect themselves with life insurance if they can afford it, whatever the future holds for the benefits system.”

Mike Preston of Compare Cover adds: “There is an insurance policy available for most budgets, which gives peace of mind that your family will be financially supported.”

HOLLY THOMAS is a financial journalist who was money editor at the Daily Express and deputy personal finance editor at the Sunday Times

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