What life insurance actually does

Term life insurance does one job: it pays a lump sum to the people you name if you die while the policy is running. Nothing more, nothing less. It is not a savings plan or an investment, and it will not pay out if you are diagnosed with a serious illness, become unable to work or lose your job. For those risks you would need different cover, such as critical illness insurance or income protection.

That simplicity is the point. In exchange for a monthly premium, your family receives money that is normally paid out free of income tax. Published claims data from UK insurers shows the overwhelming majority of term life claims are paid, but the outcome still depends on you answering medical and lifestyle questions honestly and on the policy still being in force. A healthy non-smoker in their early thirties can often arrange a few hundred thousand pounds of cover over 25 years for less than the cost of a weekly takeaway, though the exact figure depends on your circumstances.

When cover matters most as a parent

Life insurance is not compulsory, and there are families who genuinely do not need it. If you have no mortgage, no debts, substantial savings and a partner with a secure income, you may reasonably decide to skip it. For most parents, though, the risk is not just emotional but financial. If one of you died tomorrow, would the household still be able to pay the bills?

Cover becomes particularly important when:

• You have a mortgage or pay rent that depends on two incomes.
• Your children are years away from being financially independent.
• You would need to pay for childcare, after-school clubs or holiday care that one parent currently provides for free.
• Your savings would not cover more than a few months of household outgoings.
• Your income funds school fees, university support or a family business.

Stay-at-home parents are often overlooked here. Replacing the childcare, school runs and household admin that a non-earning parent provides can cost tens of thousands of pounds a year, so cover is worth considering even if you are not bringing in a salary.

How much cover do you actually need?

Ignore the round numbers suggested by adverts and work from your own figures. A practical starting point is to add up what your family would need, then subtract what they would already have.

• Outstanding mortgage or remaining rent for a set number of years.
• Debts such as credit cards, car finance and personal loans.
• Funeral costs, which commonly run to £4,000 or more.
• Childcare or school-related costs until your youngest is independent.
• Income replacement, often expressed as five to ten years of your net pay.
• An emergency buffer of a few thousand pounds.

Then deduct your savings, investments and any employer death-in-service cover, which is often three or four times your salary. As an illustration: a £180,000 mortgage, £5,000 of debts, £4,000 for funeral costs, £40,000 of childcare and £150,000 of income replacement comes to £379,000. Subtract £60,000 of savings and £120,000 of death-in-service cover and you are left with roughly £200,000 to insure. That is a far more useful target than a figure someone else invented.

Choosing the right type of policy

• Level term: pays a fixed sum whenever you die during the term. Best for income replacement and the years your children depend on you.
• Decreasing term: the payout falls roughly in line with a repayment mortgage. Cheaper, but it leaves nothing once the debt is cleared.
• Family income benefit: pays a monthly income until the end of the term rather than a lump sum, which can suit households that prefer regular support.
• Whole-of-life: runs indefinitely and is more expensive, usually used for inheritance tax planning rather than straightforward family protection.

Also think about whether to take a joint policy or two single ones. A joint policy pays out once, leaving the surviving partner uninsured afterwards, and two single policies often cost only slightly more. Check whether premiums are guaranteed for the term or reviewable, as reviewable policies can rise later.

Keeping the cost sensible

Premiums are priced on your age, health, smoking status, and the amount and length of cover you choose. There are legitimate ways to keep them manageable:

• Buy while you are younger and premiums are lower, and consider locking in a guaranteed rate.
• Insure the need you calculated, not an inflated round number.
• Check what your workplace already provides before buying extra.
• Compare like for like, and consider using a regulated adviser who can search the market for you.
• Answer every question fully. Non-disclosure is one of the most common reasons claims are declined.

Two things parents often forget

First, put the policy in trust. Writing it in trust usually means the money can be released without waiting for probate, and it may keep the payout outside your estate for inheritance tax purposes. Many insurers offer this at no extra cost, and it is one of the simplest bits of financial housekeeping available to parents.

Second, check the term length. Cover that ends when your youngest turns 18 may be too short if they go on to university or stay at home longer. Review your policy after major changes — a new mortgage, another child, a significant pay rise or a separation — because a policy that suited you five years ago may not fit today. Whether you need cover is a judgement call, but for most parents with a mortgage and dependent children, the real question is how much, and for how long.