To cover family needs, the cover should be a level amount. The cover should ideally continue until retirement, although it can be reduced once your children are no longer financially dependent (as if that ever happens!).
Remember to include car loans within the family needs. Although the term of a car loan is typically only 3 or 4 years, it is likely that once a loan begins to run-down, you will replace it with another one (and a new car). That means this borrowing is likely to remain almost permanent until retirement.
Repayment mortgages tend to reduce gradually, and you can buy special mortgage protection life assurance that reduces in line with the outstanding loan. Because the cover reduces, this type of cover is usually cheaper than level cover. However, if your mortgage is interest only, the amount owed does not reduce and you should use level cover instead.
If both partners or spouses have a need for cover, a joint policy that pays out on first death will usually work out cheaper than two stand-alone policies.
Another option is terminal illness cover where the amount insured is paid out early if terminal illness is diagnosed.
Finally, regular reviews will ensure that the amount of cover is keeping up with rises in income, and increased future expenses such as education costs. You should also review the amount of cover when you move employer, especially if your new employer does not provide life cover or provides a different amount compared to your old employer.
You can also choose cover that goes up automatically in line with inflation, which will broadly keep pace with salary rises and education costs.
Jack and Emma have similar life cover needs so should consider a joint policy to cover family needs, education costs and car loans of between £200,000 and £235,000 increasing annually in line with inflation. The term should run to the latest of their retirement dates.
They should also take out a joint reducing policy for £100,000 to cover their repayment mortgage.
Applying for life cover
Before applying for cover, you should shop around for a competitive quote. When comparing quotes, make sure you compare like-for-like – for example, if you choose increasing cover, make sure all quotes increase at the same rate.
It is also important to be truthful and complete in the answers you give during the application process. If you smoke or have a health condition, you should declare these facts when you apply. Although nearly all claims are paid, one of the main reasons for rejecting a life assurance claim is because false or incomplete information has been provided on the application form.
Making sound financial plans is important and the decisions you make can be life changing. If you need support, you may wish to speak to a financial adviser. If you do not have one, you can find one near you at www.unbiased.co.uk. Whatever advice service you choose, there will be a charge. The amount and payment terms will be explained to you by your adviser.
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