Life insurance for parents

Life insurance for parents in the UK

Whether you’re a new parent, a parent with grown-up children or looking to act on behalf of your own parents, life insurance can secure the future financial stability of your family.

The funds from a life insurance policy could one day prove absolutely invaluable, covering:

• A mortgage
• Loss of income
• Future family living costs
• Childcare fees
• Funeral costs
• Outstanding debts.

Without this cover protection, these costs would fall to your loved ones, creating an enormous and unnecessary financial strain.

Yet, unfortunately, only 50% of parents in the UK have life insurance, leaving 50% of families unprotected and vulnerable^[1].

But did you know parents can secure life insurance cover from just 20p-a-day?…

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Why do new parents need life insurance?

Life insurance secures the future financial stability of your family if you’re no longer around to provide.

Did you know the average cost of raising a child is estimated to be £231,713 over 21 years^[2].

Becoming a parent, whether you’re a new mum or a dad, is one of life’s defining moments when you begin to plan properly for the future.

Securing life insurance is a truly selfless act.

It’s also a very affordable way of ensuring your family is financially secure, whatever the future may hold.

How much life insurance do you need?

Although we believe most people would benefit from life insurance, even if you have no dependants, it definitely takes on a greater significance after you start a family.

What if either you or your partner were no longer around to provide for your children?

Key cost considerations to establish how much life cover you need include:

• Monthly mortgage repayments or rent, (£121,687 – estimated average mortgage debt^[3])
• On-going living expenses, (food, drink, clothing, car, fuel, school/university fees, leisure activities)
• Household bills, (gas, electricity, water, council tax, home maintenance)
• If your partner had to return to work, who would look after the children?
• If your partner had to pay for childcare, could they afford the fees? (£223.36 – average cost of full-time childcare^[4])
• Could they afford to absorb your personal debt? (Credit cards, car finance, personal loans).

Ideally, life insurance should cover your remaining mortgage, ensuring your family don’t have to leave their home.

It should also cover future living costs, allowing your loved ones to sustain their current standard of living.

One other consideration is inflation. What your policy is worth today, may be very different to what it’s worth in real terms, in the future.

To limit the impact of inflation some policies are linked to indexation, (Retail Price Index – RPI or the Average Earnings Index – AEI).

The cost of life insurance for parents

You have a choice of paying either a guaranteed or reviewable monthly premium.

If your premiums are guaranteed, the cost is fixed throughout the policy. In contrast, reviewable premiums, although cheaper at first, can be increased during the policy.

As with all life insurance, the greater the risk you pose to the insurer, the more expensive your monthly premium.

For example, a 42-year-old smoker with a history of health problems will pay significantly more than an active 28-year-old non-smoker.

As well as your age and smoking status, the policy type (see below) and the cover amount also have a major bearing on the cost.

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What type of life insurance do you need?

There are three main types of life insurance typically used by new parents; decreasing term, level term and the less well-known family income benefit.

Level term life insurance

• Pay out amount and term length is specified on the application
• If you die at any point during the term your loved ones receive a fixed lump sum
• Joint cover could protect you and your partner, (but will only pay out once)
• More expensive premiums than decreasing term
• Typically used to cover an interest-only mortgage and/or future living costs.

Decreasing term life insurance

• Pay out amount and term length is specified on the application
• Unlike level term life insurance, the pay out amount decreases over the term
• Joint cover could protect you and your partner, (but will only pay out once)
• Generally considered the most cost-effective policy option
• Typically used to cover a repayment mortgage, (as the debt decreases so does the cover amount).

Family income benefit

• A monthly income amount (not a lump sum) and term length is specified on the application
• The monthly income is paid tax-free
• Easier to budget as you don’t have to manage/invest a large sum
• If you die during the term your loved ones receive this amount each month until the policy expires
• Very affordable, low premiums
• This type of insurance ensures your family can afford the ongoing living expenses.

Subject to your budget, it’s possible to take out multiple life insurance policies simultaneously.

For example, a decreasing term policy could protect your mortgage, while family income benefit payments cover day-to-day living expenses.

How long do you need life insurance?

Deciding how long you require life insurance will largely depend on what it is you’re looking to protect.

For example, you may want to set your decreasing term cover to mirror the length of your mortgage.

This ensures, your most expensive asset, your home, is protected and your family wouldn’t have to move.

Alternatively, you may use the age of your children to determine the length of your policy.

This will enable you to ensure you have adequate cover to guarantee their financial security until they’re independent.

It’s also important to take into consideration the possibility that your kids may go to college and/or university.

Joint life insurance or 2 single policies?

Now we’ve established the importance of protecting both parents, the question arises as to whether to take out joint life insurance or two single policies?

The advantage of joint life insurance is you pay one monthly premium. It’s also approximately 25% cheaper compared with two single policies.

However, a joint policy will only ever pay out once, usually on the first death. Whereas single policies will provide two pay outs and potentially double the coverage.

In the dreadful event that both parents die together, a single pay out may not provide sufficient cover protection.

What’s more, after a joint life insurance pay out is issued the policy expires.

This leaves the remaining parent either uninsured or needing to obtain a new policy when older.

Having more children

Life insurance policies can usually be adapted if your personal circumstances change.

Having more children or moving to a larger home are two instances where a special event option can be triggered.

This is when the sum assured can be increased without the need for additional underwriting. (Although, this increase will be reflected in the cost of your premiums).

If a special event option isn’t available you could cancel your existing cover and take out a new policy.

Alternatively, you could keep your existing policy and take out a second policy to bridge the cover gap.

Protecting stay-at-home parents

It’s a common misconception that only working parents earning a salary require life insurance.

If a two-parent family were to suddenly become one, the remaining parent is likely to face many issues.

Problems such as having to reduce their working hours to take care of the children, or alternatively having to pay expensive childcare fees.

Think about all the unpaid jobs a stay-at-home parent performs; teacher, taxi, cook, cleaner, doctor, childminder…

Then think about the financial and practical implications if they were no longer around.

For this reason, it’s recommended that both parents secure life insurance cover.

Single parent life insurance

As a single parent, it’s likely that you’re your child’s only financial support. For this reason, life insurance is usually essential.

Despite this, only 42% of single parents have life insurance cover^[5].

As a single parent, if you were no longer around, your children would be left without your emotional or financial support.

Arranging single parent life insurance is no different from arranging a single policy.

Determine what it is you’re looking to protect, how much cover you need and how long you need it for.

You’ll continue to pay premiums for the duration of the policy and if you die during the term, your beneficiaries will receive a pay out.

Life insurance for young parents

It’s not uncommon to become a parent as young as 16 years old.

Unfortunately, this also means that you’re financially responsible for another human being.

Even at this young age, if the worst were to happen to you it would leave your child financially vulnerable.

Arranging life insurance in young parenthood can actually be the prime time to arrange cover.

Being younger and likely in good health will result in low premiums, meaning that you can secure protection until your dependants are independent for just 20p a day.

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Life insurance for children

Due to no loss of income impacting the ability to meet ongoing daily living costs, covering your children with a life insurance policy is often deemed unnecessary.

However, taking out life insurance as a parent can protect your children, providing them with financial stability should you pass away.

Please note, the youngest you can apply for life insurance through the insurers Reassured use is 17.

When choosing between insuring yourself or your child, it would generally be suggested to invest the money in a life insurance policy for yourself.

Alternatively, if you’re looking to protect the life of your child, it may be more beneficial to consider critical illness cover.

Critical illness provides you with a pay out if you’re diagnosed with a serious, but non-life threatening illness, which is named on the policy.

However, this type of cover has the added benefit of also offering protection for your children.

This means if they’re diagnosed with a serious or terminal illness, a pay-out will also be made.

This money could be used to cover the loss of income from looking after your sick child or to fund expensive medical treatment.

Critical illness and terminal illness

Statistics show that we’re far more likely to suffer a critical illness during our working lives than to die.

As a result, when arranging life insurance it could be a good idea to add additional critical illness and/or terminal illness elements.

Critical illness

• Pays out early if you’re diagnosed with an illness covered by your policy
• Common conditions covered are cancer, heart attack, stroke and multiple sclerosis
• Can be taken out as part of a life insurance policy or as a standalone policy
• If part of your life insurance, the total pay out of the policy won’t exceed the sum assured
• If you make a full recovery you’ll not have to repay the money.

Terminal illness

• Pays out if you’re diagnosed with an illness and expected to die within 12 months
• Often included as standard on a life insurance policy
• You can only claim once, (not on diagnosis and again when you die)
• If you live past 12 months you’ll not have to repay the money.

You could utilise an early pay out to enjoy quality time with your family, cover the loss of earnings, fund expensive medical care or pay for necessary adaptations to your home.

Free life insurance for parents

Several life insurers in the market have recently begun offering free life insurance for parents.

Cover lasts for the first year of their child’s life and usually protects each parent for a sum assured of around £10,000.

Whilst this may seem like a great deal, in reality, £10,000 is unlikely to be sufficient to support your family if the worst were to happen.

Factoring in costs such as mortgages, debts, childcare and family living costs, it’s easy to see how fast this £10,000 would go.

Therefore, to provide peace of mind and ensure your family receives the true amount of cover they require, it’s best to arrange standard life cover with a sum assured which is sufficient to meet the needs of your family.

Life insurance for your parents

It’s often questioned whether or not you can purchase life insurance on behalf of your parents – the answer is yes.

It’s possible to purchase life insurance on behalf of your parents, although the policy will remain in their name and any decisions regarding the policy (such as cancellation) will remain theirs.

Also, your parents will need to complete any required health and lifestyle questionnaires themselves.

As with any policy, the insurer will assess the likelihood of a claim being made and calculate the monthly premium accordingly.

When deciding to take out life insurance on behalf of your parents, it’s important to consider the type of life insurance policy most suitable.

This will be determined by their age, health, smoking status and the sum assured they’re looking to secure.

It’s common for children to look into taking out cover for their parents when they’re in later life.

In this scenario, whole of life insurance or an over 50s plan would generally be the most suitable options.

Write your life insurance in trust

Writing your life insurance in trust can help your pay out avoid 40% inheritance tax and probate.

At Reassured, we offer a free trust service to help you with the lengthy application process. We’re also on hand to answer any questions you may have.

The key benefits of writing your policy into trust are:

• Avoid or minimise 40% inheritance tax, (over the £325,000 threshold)
• Avoid the lengthy probate process, (for a quicker pay out)
• More control over who gets the money and when.

Saving money on life insurance

When you have a baby not only does this have an impact on your time, but also on your disposable income. Raising a child in the UK is expensive.

As a result, you’ll want to make sure your premiums are as low as possible, whilst still providing sufficient cover.

Tips on how parents could save money on your life insurance premium:

• Take out life insurance when you’re young, (ideally in your 20s or early 30s)
• Make sure your policy term is not unnecessarily long
• Live a healthier lifestyle, (lose weight, stop smoking, exercise regularly)
• Don’t overprotect yourself/take out more cover than you need
• Compare quotes or ask a broker to do it on your behalf, as quotes can vary.

Life insurance for parents in summary:

• Decreasing term, level term, family income benefit options available
• Consider how long you require cover, (i.e. until the mortgage is paid off and/or until children have left home)
• Don’t over-protect yourself and pay unnecessarily high premiums
• Don’t under-protect yourself and leave your loved ones exposed
• Stay-at-home parents also benefit from life insurance
• Joint life insurance premiums are cheaper, (but only pays out once)
• Critical and terminal illness cover options available
• You can take out life insurance on behalf of a parent
• To maximise the pay out you can write your policy in trust
• Premium costs vary, so compare multiple quotes.

Let us compare the best available quotes for you, (it’s free)

You may be surprised to learn that the cost of premiums can vary significantly, as insurers employ different underwriting criteria.

Regardless of whether you’re a new or an established parent, it’s really important to compare quotes to secure the best deal.

Reassured is the UK’s largest FCA registered life insurance broker. We’ll scan the market on your behalf, identifying the very best quotes.

What’s more, our award-winning, no-obligation service is completely free to use.

So, if you’re a parent without life insurance protection why not put us to work?

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Sources:

[1] https://www.legalandgeneral.com/life-cover/confused-about-life-cover/articles-and-guides/protection-life-insurance-poll.html

[2] https://themoneycharity.org.uk/money-statistics/september-2017/

[3] https://themoneycharity.org.uk/money-statistics/51592/

[4] https://www.moneyadviceservice.org.uk/en/articles/childcare-costs

[5] https://www.beaglestreet.com/help/guides/single-parents/