Life insurance policies can provide financial support at a time when your family may need it the most. It can help to ensure that when you pass away, household payments like a mortgage, funeral costs or the cost of raising children are met.
Thinking about what happens to our family after we pass away can be a difficult scenario to plan for, but there are several reasons why this should be prioritised in any financial plan.
In this blog we outline different scenarios where life insurance can be beneficial, and how a financial planner can help to recommend the right insurance for your specific circumstances.
Possible life insurance needs
If your income stops upon death and you have people that depend on you financially, you should consider having life cover in place. The same goes for any spouse, as you may rely on each other regardless of whether you both work. If you have younger children, they will still need ongoing support that one salary alone may not cover. In the event of your death or theirs, you or your spouse will most likely need to take time off work to grieve. Depending on your employer and the time you need to take, this may cause an initial dent in your finances.
Life insurance isn’t just for parents with young families either, you could need insurance throughout your life and the reason behind that need can change as you continue to age.
Here are some examples of the various requirements for cover:
| Scenario | Possible needs |
| David is 37. He has a spouse named Julia, and they have four children. Julia is currently unemployed and they have a substantial mortgage.
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David could consider insurance for the mortgage (and any other loans). Julia and the children also have future financial needs he should consider getting insurance for. Equally, they should acknowledge the possibility of Julia’s death, and the impact this would have. Would David be able to continue to work and earn at the same level? What would happen to their mortgage then?
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| Molly is 72 and widowed. She has an estate worth over £1.5 million and hopes to leave this to her children and grandchildren. She is focused on mitigating the impact of an inheritance tax bill and needs a plan that can assure she’s putting the right money in the right hands, whenever the best time for this would be.
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Molly could look to obtain some life insurance. By taking out life insurance that she can assign to a trust, Molly can ensure that the money is available to her beneficiaries when the inheritance tax (IHT) bill lands.
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| Stanley is 82 and his wife, Jean, is 79. They have moderate assets and very little savings but both have a decent pension income. Their biggest fear is the funeral costs their family will incur when they die.
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Life insurance might be appropriate here. This can help to secure their wishes, making sure that a lump sum is available when their family approach the financial burden of any hefty funeral costs.
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| Kirsten and Michael are friends who run a successful pet food business, a limited company in which they each own 50% of the shares. They are worried that if one of them should pass away, the other’s shares would be inherited by family member who could potentially not contribute anything to the business they have built together.
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Life insurance can be the answer here – providing peace of mind that the deceased’s family is compensated, yet simultaneously granting the surviving business partner ownership of the entire business.
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Finding the right life insurance policies for you
It’s important to financially protect your family, so what options are there to consider?
Whole of life – as the name suggests, this type of policy administers cover for the whole of your life. Its fundamental uses are in IHT planning and arrangements for funeral costs. These policies can, in some cases, have considerable investment values available to cash in. Returns aren’t guaranteed, and what you receive will rely on market performance.
Term assurance is often the route to take when protecting your family. It can offer insurance at the lowest cost for the time span required. The policy pays out if you die during the term, but if you live to the end of the term the contract will finish with no pay-out. The cost of term assurance varies significantly and relies heavily on your age and health. A person’s state of health is also important; chronic illness and general ill health could mean more expensive premiums or even the possibility that the individual is denied any insurance at all.
Although term assurance isn’t a complex insurance, there are variations to cater for a diverse range of needs such as increasing and decreasing term, mortgage protection and family income benefit. You can find out more about these in our recent guide.
Family income benefit – These policies pay a yearly sum if you pass away during the term of the policy and payments proceed until the end of the term. This can be a great way to provide peace of mind for your family after you have passed away. Family income benefit can give you a higher initial cover for a lower cost as a type of decreasing term assurance.
Example:
Matthew has five-year-old twins. He needs to prepare cover so his family would be protected until they reach 21 years old. He estimates they would need £30,000 a year for this, using a family income benefit policy to cover the liability. If he were to die after a year of having this cover out, the policy would pay £30,000 a year for the full 16 years – a total of £480,000. If he were to die two years before the end of the term, it would pay a sum of £60,000, in the form of £30,000 a year for those last two years.
Life insurance policy in a trust
If you are worried the money from your cover won’t reach the people you intend it to go to, you may want to investigate putting the policy into a trust. Some types of trust give the trustees discretion or flexibility about how they apportion the benefits, but we suggest you get advice about this from a dedicated financial planner.
When you die, the money from this cover doesn’t go into your estate automatically – it gets paid out to your beneficiaries/trustees of the trust. This quickens the pace of the payment as well as avoiding an IHT bill and will ease any concerns you have about what happens to this money when you’re no longer here.
Can my employer provide life insurance?
If you are employed, you may have life cover from your employer. Bear this in mind when you’re deciding how much insurance you need. However, you do need to acknowledge the likelihood of losing this cover if you leave your employer. At which point you would need to consider taking out some extra cover.
Relevant life policies are where employers can take out these policies on the lives of employees. While they are not part of their pensions, they do have tax advantages.
When deliberating life insurance, it is essential you look at your options. What are your priorities now? How much cover do you require? Can you delay some cover until a later date?
How a financial planner can help
A financial planner can help you to understand your incomings and outgoings so you can better understand your usual pattern of expenditure, as this provides a good starting point for your estimates.
As you get older, your circumstances can often change. Income may fluctuate, relationships change and children grow into adults. It’s therefore important to review the amount of life cover you have on a regular basis to ensure that it is still appropriate for your needs.
A trusted financial planner can be best placed to make the right recommendations for you. It is their responsibility to carry out regular reviews that can help address any new personal preferences or financial needs. If you need help with finding the right life insurance for you, please don’t hesitate to contact our team of professionals.
