As fancy as financial advice can be, some of the very basic requirements can often be overlooked. One of those is life insurance to cover yourself against death, to ensure bills can be paid, your family is protected, and they can live with dignity in the face of the pain of an extraordinary emotional impact.
This was hit home to me over 30 years ago when a customer called to say her 34-year-old husband had died suddenly. I had only set up their financial plans five months before. Five months pregnant and with two young children, her first words were: “Are we going to be okay”? In one of the most defining moments of my life and career, I was able to say: “You’ll be just fine”.
Whilst it’s a morbid subject, it is absolutely essential that families (and businesses) protect themselves in the event of a key member of the family or business passing on. Financial trauma, on top of the trauma of losing a loved one is quite something.
Key tips to get the right level of life insurance
If you run your own business, use the business to take out a relevant life insurance policy on you. This will ensure the business pays the premium rather than you, as you will pay tax and national insurance first on your income, then pay the premium, which is an unnecessary expense.
Be sure to use an independent financial adviser to assess the cheapest premiums. Using a bank or tied agent (such as St James Place) will mean you miss out on the cheapest premiums available.
Check what death in service benefits you may have so you don’t over insure yourself (ie pay more than you need to). Remember, however, that if you leave that employment, you will lose that cover. Meanwhile your health may have deteriorated, and you may not be insurable, or the cost may be excessive, so taking out independent cover well in advance may be a smart move.
Work out how long you need to cover for. If you were quoting for yourself for a 30-year plan, this means the company guarantees to be insuring you in 30 years when you are effectively at most risk. If you only needed to be insured for, say, 25 years to cover a mortgage, or until your child was no longer financially dependent, the premium would be less, as the risk is less.
Choose the most appropriate plan. If you are insuring against a decreasing mortgage, a decreasing life cover will suit. It is also cheaper as the amount you are insuring for is decreasing, while you are most at risk because of age. If you are insuring against an income, a family income benefit plan produces an income in the event of death for a set period of time that you choose. Knowing the term, the amount and time, will ensure you don’t pay more than you need to.
How much do you need? That’s a bit trickier as the potential variations are much greater. Check what debts need repaying and include those. Check what bills will no longer apply after a death and then what income will be lost from the deceased. The gap between the two is the insurable need. You can insure that as an annual income or as a lump sum amount which will need correct assessment that this column space can’t cover.
If you have already taken out life insurance cover in the past, check it again, as rates may have changed downwards and the premium may be cheaper now. Similarly, if you have altered your health/lifestyle, the premium may change. If you took out your plan as a smoker and you have given up for typically more than one year, you may be classed as a non-smoker at that point and the premiums would be significantly cheaper.
A whole of life plan is sometimes sold as a good idea as it provides a cash benefit at the end, but that fund pays tax as it grows so it’s really not a very efficient way to save.
Finally, give this morbid subject that bit of attention so you can be ‘just fine’ too.
You can address any query you have about the content of this column and life insurance to Peter’s team. Call 01872 222422, email [email protected] or visit wwfp.net.
If you found Life insurance – don’t trust to luck for your family’s security helpful, you can read more of Peter’s money management columns on our Finance channels.
About the Author / Peter McGahan
Peter McGahan is Chief Executive Officer of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
