Life insurance helps to financially protect your loved ones should the worst happen. But, with living costs rising, what does this mean for your life insurance pay out?
Many years ago, a sum assured of £100,000 could have gone a long way for your loved ones. But the same amount might not stretch so far today due to rising costs in the UK.
Below we explore the essential living costs that that have increased due to inflation and how you can protect your loved ones from inflation in the future.
Inflation
Inflation refers to a general increase of our goods and services, meaning the same money could buy you less today than it could in the past.
In 2022, inflation hit a 41 year high in the UK – rising to 11.1%. As of August 2024, the UK’s annual inflation rate was at 2.2%. However, it’s predicted to increase to around 2.5% by the end of the year.
Living costs
How much life insurance you need can generally be determined by adding up your financial commitments and key costs.
As a result of rising inflation, many essential day-to-day living costs have gone up. Meaning that the level of life insurance that the average family is likely to need is now much higher than it once was.
What living costs have gone up?
· Mortgage – Yopa report that average house prices are now 25% higher than they were in 2019
· Childcare – according to the Trades Union Congress, since 2010, the cost of childcare for parents with children under 2 has increased by more than £2,000 per year
· Everyday living – as of September 2024, 49% of UK households reported that their cost of living had increased
· Funeral costs – the average cost of a funeral has risen to £4,141 (for a basic send-off), the highest SunLife have seen in 20 years of research
The cost of life insurance
A common misconception is that life insurance is an unaffordable expense. In fact, only 35% of UK adults currently hold a life insurance policy, with one third of those without stating cost as their reason for not holding a policy.
Life insurance can actually be secured from as little as £5 per month (depending on your personal circumstances), so a policy could be more affordable than some of your other monthly outgoings.
Leading life insurance broker Reassured recently published an average cost of life insurance UK guide using insight from over 100,000 policies they have sold.
Plan for the future
Ultimately, life insurance is there to protect the financial future of your loved ones. Therefore, you could consider rising costs when determining how much cover you take out.
This could simply be by taking out slightly more cover than is currently required as a ‘just in case’ or there are other policy benefits you could utilise.
· Indexation - the best way to protect a life insurance pay out from inflation is to opt for an increasing cover option or ‘indexation’.
Many insurers offer this option, which you’ll need to choose during the application process. With this option, your sum assured will increase (most commonly each year) to keep up with the Retail Price Index (RRP), protecting your payout from inflation. Your monthly premium will change in line with your new sum assured.
· Guaranteed insurability - Alternatively, most policies come with a benefit known as ‘guaranteed insurability. This isn’t linked to inflation, but it does allow you to make changes to your policy (such as increasing your cover amount) to keep up with new circumstances.
For example, if you moved to a new home with a larger mortgage, you can increase your sum assured to mirror your new balance. The benefit is you don’t need to provide any additional medical information, so your new premium is simply based on your new cover amount. It’s a great alternative to securing a new policy if your circumstances change and your level of cover is no longer sufficient.
Life insurance FAQs
How does life insurance work?
Life insurance works by paying out a cash lump sum to your loved ones after your passing (while your policy is active).
You’ll apply for a policy, where your eligibility and the price you’ll pay for your cover will be determined.
Once your policy is in place, you’ll need to pay your monthly life insurance premiums to keep your coverage valid.
Should you pass away during the policy term, your loved ones can make a claim and receive a pay out.
How much life insurance do I need?
How much life insurance you need will depend on what you want to cover for your loved ones.
For example, if you want to cover your mortgage and family living costs, your sum assured could mirror these two costs added together.
If you’re looking to leave a sum of money as an inheritance and to cover the cost of your funeral, your sum assured can be however much you’d like to leave plus the average cost of a funeral.
What life insurance policy options are there?
There are four main life insurance policy types, these are:
· Level term life insurance – provides cover for a set period (the term) and provides a fixed lump sum pay out to your loved ones if you pass away during this time.
· Decreasing term life insurance – provides cover for a set period and will pay out if you pass away during this time. The sum assured reduces throughout the policy term.
· Whole of life insurance – provides lifelong cover and guarantees a pay out when you pass away.
· Over 50 life insurance – guarantees acceptance to UK residents aged 50 – 80 (or 85 depending on the insurer) and provides lifelong cover.
Is life insurance worth it?
Ultimately, whether life insurance is worth it for you will depend on your personal circumstances.
If you have anyone that depends on you and would be financially impacted by your passing, life insurance could be beneficial in providing them with a safety net to allow them to continue with their current standard of living.
Financial disclosure
This press release may contain forward-looking statements. Forward-looking statements describe future expectations, plans, results, or strategies (including product offerings, regulatory plans and business plans) and may change without notice. You are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements.
Website of Source: https://www.sunlife.co.uk
Source: Story.KISSPR.com
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