None of us likes to dwell on the fact that the world will keep spinning after we’ve gone. However, life insurance can be a vital part of your family’s financial planning and can offer comfort and reassurance for the family should the worst happen.
As you will know, a solid financial plan is a sequence of milestones and key events. Inevitably, when confronted by your own mortality, you can’t help but think of what may happen to the people you leave behind.
Will your next of kin be able to meet the various expenses and debts you may leave behind? Will your other half be able to maintain their lifestyle, get the kids through to university and beyond? If the worst should happen and you pass away before your time, finances do not have to be an additional source of stress for those left behind.
Whether you wish to leave £100,000 or £1,000,000, making this provision early can offer you peace of mind.
When you might need protection
The first step to determining whether or not you need life insurance is to consider what your current debts and financial obligations are and how these would be impacted if you were no longer around. Would your loved ones be able to make ends meet?
You may have a death in service policy through work, rental income, savings and investments or a pension plan, which may help mitigate some of the impact.
Some other factors to consider include:
- If you have a mortgage, you may want to ensure this is repaid should anything happen to you.
- If your children are at an independent school, what provision do you have to make sure the fees are covered?
- Your funeral costs are likely to have an impact, even if you have modest requirements.
4 reasons we recommend life insurance in our financial plans
While there are many reasons why we might recommend a life insurance policy in a financial plan, there are four main scenarios.
1. You’ve just got married
Getting engaged usually prompts clients to have conversations about merging finances and the joining of families and updating of financial plans. This is an ideal time to consider if you have adequate financial protection in case one of you were to die.
While your vows might read “till death do us part” most of us feel our responsibility to each other lasts a lot longer.
Depending on your circumstances, you may opt for:
- A “joint life” policy that covers both of you. While this is usually cheaper, it may only pay out on first death. So, once you make a claim, the survivor won’t be covered anymore and will need to take out a new policy.
- A “single life” policy – you each have your own policy. If each of you have your own single policy, this can take away the complexity and stress of the survivor having to take out a new policy later in life when the premiums are usually higher. It also covers you in the unfortunate circumstance of the relationship coming to an end.
There are advantages and disadvantages to each option. Speak to us to help you make the decision that’s right for your circumstances.
2. You’re buying a new home
Buying a home is one of the main occasions where it’s wise to review the protection you have in place.
If you die before you repay your mortgage, the responsibility for continuing these payments falls to your next of kin. Life insurance is a proactive step to ensure those left behind can meet those financial commitments.
The kind of mortgage you have can influence what type of life cover you need.
The most common policy for a repayment mortgage is a “deceasing term” policy. Over time, the amount of cover decreases in line with your outstanding mortgage, and so this type of protection is designed to repay whatever debt remains if you die.
Monthly payments on a decreasing term policy tend to be lower, making it a useful tool to ensure your mortgage is repaid should anything happen.
If you have an interest-only mortgage, the amount you have borrowed typically won’t decrease (unless you are making additional payments). You may therefore want to consider a “level term” policy. This ensures the lump sum is the same whether you died in the first week or the day before the policy expires.
3. You’re having a baby
Children are expensive. Indeed, the latest report from the Child Poverty Action Group (CPAG) suggests that it costs £152,747 for a couple to bring up a child to the age of 18.
As a family you may also have considerations such as private education and university contributions that you may need to account for. You may wish to ensure there’s financial support in place to cover your children until they have finished their education, or even reached maturity (however we define that these days!).
Having protection in place to provide for your children, should the worst happen, can provide real peace of mind. While a lump sum won’t replace you, it can ensure that their lives stay as normal as possible should the worst happen.
The type of cover you choose here will depend on your situation. You may wish to ensure the mortgage is paid off and a lump sum is provided to help your children until they are financially independent. Again, speak to us and we can help you to find the right protection.
4. You have a potential Inheritance Tax issue
As part of any financial plan, we look at how we pass your assets through to the next generation as tax-efficiently as possible. Most of us want to maximise the estate we leave to the next generation, and there are circumstances where a life insurance policy can help.
Without sensible planning, Inheritance Tax bills can be scarily high, and this can significantly impact your children’s inheritance.
A key element of your financial plan may be to purchase a life insurance policy to safeguard against this potential tax bill and ensure that your children receive everything you wish them to.
It may also be good planning to place this insurance policy into a trust. Providing the conditions of the trust are met, these assets will no longer form part of your estate for Inheritance Tax purposes, meaning your family can access the funds to help with expenses and probate.
A trust can also allow you to decide how the assets should be managed. For example, you may wish for the assets to go straight to the beneficiary after your death. Alternatively, you may want them to be retained by a trustee until your beneficiary reaches a certain age. This is particularly important when considering younger children.
You may also want to have a conversation with your partner about who you would want to look after your children, and who would be the best person to handle the financial side of your estate.
As with all things, trusts come with some important legal implications. You should always take prudent financial advice at the outset as, once you have placed a policy into trust, it can be complicated to reverse this. You need to be comfortable with the decision before committing.
Get in touch
The right protection is the cornerstone of a robust financial plan. To find out how we can give you the peace of mind that you have adequate protection in place, please get in touch. Email email@example.com or call us on 01189 876655.