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Family life insurance and finances

If you're concerned about how your family might manage financially without you there to provide for them, find out how to choose the right life insurance to take care of their future.

Amy Smith
Amy Smith
Updated 05 March 2021  | 4 min read

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How can I make sure my family are provided for when I die?

There are two main ways to provide for your family once you’re gone:

  • Make a will, detailing how your estate can be shared out
  • Life insurance. This will pay out a lump sum to your family to help repay the mortgage, cover any debts and pay death expenses like funeral bills. 

Although you might think there’s enough in your savings or investments to provide for your family after your death, distributing an estate can take months or even years. Life insurance can make sure your family have some funds more quickly.

That’s important if you think your loved one will have enough to deal with at an already difficult time for them. Life insurance can at least ease the financial strain of planning a funeral and administering an estate.

Key points

  • Several types of life insurance can give your family financial protection after you die
  • Make sure you consider any type of life insurance (or income protection cover) carefully to work out whether it’s suitable for your family and offers the right level of cover
  • When working out how much cover your family will need, consider everyday expenses and any debts they’d have to pay off

What’s family life insurance? 

It isn't a particular type of policy. Family life insurance can be any life insurance policy or other type of income protection that you set up to pay out to your family when you die.

The payout can be used by your family to help pay for a funeral, clear your mortgage and debts, or cover everyday expenses.

Some might be put away to pay for your children’s future expenses, like university.

How does family life insurance work?

You decide what type of life insurance you want, how long you want to be covered for and the amount of cover. Then you add your family as beneficiaries and pay the insurer a regular premium. 

 If you die during the policy term, your family will receive the agreed payout amount. Or some policies pay out if you’re diagnosed with a terminal illness and have a life expectancy of less than 12 months. 

The payout amount can vary over time too, depending on the type of policy you choose.

Types of life insurance that can help protect your family 

There are a few different types of life insurance cover:

Level term

Level term life insurance will pay out a lump sum to your family if you die during the cover term.

The payout amount is chosen by you when you take out the policy and it stays the same throughout the term. But if you die after the term has ended, your beneficiaries won’t receive anything.

Decreasing term (mortgage cover)

Decreasing term life insurance policy offers a payout amount that decreases over time. It could be useful if you just want to help your family pay off a mortgage if you die. Your family will only get a pay out if you die within the policy term.

Whole of life

Whole of life insurance doesn’t have a fixed term – it’ll pay out whenever you die. But this usually makes it the most expensive option.

Whole of life policies may have different tax treatment to term policies, so you should get independent advice to check it’s suitable for you first.

Single or joint life insurance policy?

If your spouse or partner’s also considering life insurance, you have the option of taking out a joint life insurance policy. It could be cheaper than two individual policies, but there's usually only one payout, after the first person dies.

The policy will end at that point, so there’s no second payout  if the other joint policyholder passes away later.

If you and your partner have your own single life insurance policy, each of you will name your beneficiaries and the policies will pay out independently of each other if you both die within the term of the policy.

For example, if you both name your eldest child as the beneficiary, they'll receive two payouts - one when you die and one upon your partner's death.

Other options to make your family financially secure

Life insurance isn’t your only option. There are a range of other products that can offer financial support to your family.

Family income benefit

Family income benefit is a type of life insurance that pays out a monthly sum to your family rather than a one-off lump sum. That means it’ll act as a replacement for your wage.

It’ll cover a set term, for example until you’d be at retirement age. So, it’ll only pay out if you die within the term.

Death in service cover

Death in service is a type of insurance usually offered by your employer as part of your overall package.

The lump sum is a multiple of your salary, and is paid to your beneficiaries if you pass away while employed by the company that provides the cover.

If you leave the company you work for, you can’t take the cover with you and it’ll end when you employment does.

Critical illness cover

Critical illness cover is sometimes offered as an add-on to your life cover, but you can buy it as a separate policy.

It’ll pay out if you’re diagnosed with a specified illness – each insurer lists different illnesses, so check the policy first.

Some critical illness policies include cover for your children. So if they become ill with a specified illness you may be able to make a claim. There’s usually a limit to the amount you can claim, but making a claim for a child doesn’t impact the main policy.

Just like life insurance, you pick the payout amount and the term you’re covered for.

Income protection

Income protection will cover you if you can’t work due to illness, injury or if you're made redundant (although this aspect is currently unavailable due to the Covid-19 pandemic).

Unlike critical illness cover there isn't a dedicated list of qualifying illnesses. Income protection can be bought as a short-term or long-term policy.

How much cover do I need for my family?

This depends on your family circumstances. When working out the amount of cover you need, you should consider your family’s living expenses, your mortgage and any other debts you may leave behind.

Who needs family life insurance?

Family life insurance could be suitable for:

  • Young families – if you’ve recently had children or are considering starting a family, life insurance for new parents could help you feel more secure that your partner won’t be left with a financial burden if they become a lone parent or guardian
  • Families with older children – a payout could help your family pay off debts and bills, or go towards your children’s education and training, including university costs
  • Single parents – if you died during the cover term, the payout could be used to help your family support your children as they grow up
  • New couples – you might rely on both your incomes to pay the bills, so it’s worth discussing your life insurance options and whether joint or single policies will work best for you
  • Homeowners – consider whether your family could afford to pay your mortgage or other household bills without you

Will my family pay tax on the money they receive?

Your family won’t usually have to pay income or capital gains tax on the money paid out by your life insurance (depending on the kind of policy), but your estate may have to pay inheritance tax – it depends on the type of policy you choose and how it’s set up.

You might be able to write your life insurance policy ‘in trust’. This is where a third party (the trustee) looks after your money for the benefit of your family (the beneficiaries).

The money ‘belongs’ to the trust rather than you, so it falls outside your estate which means it usually isn’t liable for inheritance tax. Most insurers already have trusts set up for this purpose, so check with them to see if your policy is set up this way.