Protecting your family is one of most important reasons that people seek professional financial advice. The ‘what happens if’ scenarios below can be uncomfortable to contemplate. But the knowledge that your financial affairs are taken care of, should the unforeseen happen, is incredibly reassuring.
Life insurance: so what would happen if…?
• You were to die or have a critical illness?
• You took longer to recover from an accident than you could financially cope with?
• You were to die without life insurance, could your spouse keep paying the mortgage?
• You were to lose your home because you had inadequate protection?
Most of us go about thinking ‘it won’t happen to me’ and thankfully the odds are it won’t. However, wouldn’t you prefer to have proper life insurance in place to protect those you love?
We’ll look at what suits you and your family’s circumstances best and recommend the best cover.
Top Tip: people’s circumstances change and so it’s worth having a regular review of your financial position.
Buying a home
The biggest debt you’re ever likely to have isn’t something you’d want your family to inherit. That’s why we’ll advise you on the best way to protect your mortgage repayments so that repossession is never a possibility. Remember that that whilst your mortgage lender will probably be able to offer you convenient cover, it’s unlikely to be the best you can find if you were to shop around. We’ll help you with that too.
Tying the knot
With marriage comes responsibility. That usually means joint financial commitments. So once again the financial security of the remaining partner or both partners in the event of a serious illness is something we can tie up for you.
Couples often buy one policy. This means that in the first instance of a claim the policy will pay out. However once the policy has had the claimant paid it will often cease. Therefore it is often better to buy two single policies so that in the event of a claim by one partner, the other partner still has cover.
This could be quite important as this may be many years later and the cost of a new policy at this stage could be much higher and the remaining partner may have had health issues which would make the new policy even more expensive, if cover could be put in place at all.
Top Tip: The cost of buying two policies is often very similar in price to a joint policy.
According to a major insurance company, the cost of raising a child to the age of 21 is now in excess of £220,000, which is a rise of almost 60% in the last 10 years.
The added cost children bring means adequate financial protection is now more important than ever. For one, there’s a bigger strain on your household budget. And you may find you need a larger house and car. Added to which, education costs have risen enormously, particularly with the recent rises in university fees.
As your children grow, will you need a larger home?
A larger mortgage means your protection will need an overhaul. Your life insurance needs to be able to settle your mortgage debt, and also tie in with the length of your home loan as you may have extended this period. There is some good news though. The costs may not be as much as you think; life insurance for a specified term costs a reasonable rate and if cover is linked to a capital and interest mortgage then this cost often reduces so that you are only ensuring the outstanding debt.
Protection in employment
Employers often provide a ‘death in-service’ benefit. This provides a lump sum to your named beneficiaries should you die whilst working for the company. Typically this figure is set at a multiple of two to four times your annual salary.
If you change your job, then do check that your new employer includes this benefit. Otherwise you should increase the amount of cover that you have.
You’re the boss
If you’re self-employed or run your own business, you need sufficient cover in place to provide for your family. You should also think about what would happen to your share of the business if you were to die or suffer a serious illness. Sometimes life insurance will enable your fellow directors or partners to buy your share of business from your family.
Protection for a happy retirement
Once you are retired very often your need for life insurance or critical illness may cease. However your retirement benefits may not provide sufficiently for your spouse. It’s worth thinking about continuing your cover so that your spouse receives a sum of money when you die.
If you’re fortunate to build up assets in the form of property or investments, your estate will be charged inheritance tax on your death. You can use life insurance to protect your estate from the charge on your estate over the inheritance tax-free limit (nil rate band).
One complication with life insurance is that whilst it provides a large lump sum or your family, this will be added to the worth of your spouse’s estate.
This may mean that your children will owe inheritance tax when your spouse dies. To avoid this you should place the life insurance sum assured outside your estate by using a trust.
Protecting your health and your wealth
Life insurance is underwritten and a number of factors taking into account when deciding how much you are going to be charged the cover you take out. These will include your age, your general health and occupation.
If you smoke you will pay much more for life insurance. Therefore if you give up smoking and this can be shown through testing, you should have a reduced premium for the same level of cover. Normally you must have given up smoking for a minimum of 12 months and should not be using replacement nicotine products.
Are you the adventurous type?
Clearly your lifestyle is linked the cost of your life insurance. If you’re a risk-taker and into extreme sports then, fair play, you’d expect to pay a little more on your insurance premium. But you should make sure an untimely death is insured against as some insurers will exclude certain adventurous sports from the scope of their cover.
Finally, a word of caution
The new Consumer Insurance Bill of 2013 insists that prospective policyholders must take reasonable care to answer the insurer’s questions, as asked, both accurately and fully and if information is volunteered, that this is not misleading. If any disclosure is seen as being fraudulent or not fully given then the Insurers may treat the plan as if it never existed and decline all claims – if the misrepresentation was deliberate or reckless.