Should you consider purchasing life insurance?
Whether or not you should buy life insurance is a personal decision that depends on your individual circumstances. If you pass away, life insurance can provide financial security for your loved ones by paying out a lump sum of money. This money can be used to pay off debts, cover funeral expenses, or provide for your loved ones' future needs, which can give you peace of mind knowing that your loved ones will be financially secure if you pass away.
There are several things to consider when choosing to purchase life insurance:
Do you have dependents? If you have dependents, such as a spouse, children, or other loved ones who rely on your income, life insurance can help to provide financial support for them if you die.
What are your financial obligations? Do you have a mortgage, car loan, or other debts that would be difficult for your dependents to repay if you died? Life insurance can help to pay off these debts, which can give your loved ones peace of mind. You can also set your policy to pay-out an amount that decreases with your mortgage balance, which can make the monthly premiums more affordable.
What is your income? The amount of life insurance you need will depend on your income. If you have a high income, you generally need more life insurance than someone with a lower income to sustain your loved ones’ lifestyle.
How is your health? If you have any pre-existing health problems or are a smoker, you may be required to pay higher premiums for life insurance. As you get older, the premiums become increasingly and often prohibitively expensive. It’s good to ensure that you are also putting money aside for retirement and paying off your mortgage, so that life insurance is no longer needed once you hit old age.
Life insurance policies are excluded from the current personal income tax regime. Life insurance premiums are not tax deductible, but in the event of a valid claim the cash sum will not be subject to income tax.
However, a payout from your life insurance policy may be subject to Inheritance Tax (IHT) if it forms part of your estate. One option to avoid this is to put your life insurance 'in trust', this is a legal arrangement that lets you leave assets to friends, family or whoever you choose to be your beneficiary, but will not be considered part of your estate and not be subject to IHT. If you wish to leave a payout to your spouse, this will increase the value of their estate, which may create IHT implications when they pass away. You can opt to set-up a pilot trust and elect for it to be paid into this trust. Your partner can be permitted to borrow money from the trust, which creates a debt obligation on their estate thereby reducing their IHT liability.
If you are considering buying life insurance, it is important to shop around and compare different policies. You should also make sure that you understand the terms and conditions of the policy before you buy it.
