Your family's financial security for the price of a coffee
Life insurance is the underpin of most good financial planning. If you have people who depend on you financially, you should have it in place.
Many couples, especially those with children, would accept that if the main breadwinner died, the surviving spouse would have to drastically reduce their living costs to survive.
Why you might need life insurance
- Paying off a mortgage (or other loan) if a borrower dies.
- Protecting a family against the early death of a spouse, partner or parent, particularly important for people with financial responsibility for children.
- Paying for a funeral.
- Paying inheritance tax (IHT).
- Protecting a business against the financial consequences of the loss of its owner or a key employee.
The value of life insurance is that it helps to maintain an everyday standard of living; in short, it puts money in the hands of those who need it when a person dies.
Worryingly however, households in the UK are more likely to insure their televisions or smartphones. Figures published by the Association of British Insurers show that more than three quarters (78%) of households have home contents insurance, but just a third (34%) have life insurance1.
The average cost of a life insurance policy is £1.40 a day – roughly the price of a cappuccino.
For some it is the cost, or perceived cost, of insurance that is too great an expense to bear. For those that have it, the average spend on life insurance is £509 a year per household2. This is the equivalent of £1.40 a day – roughly the price of a cappuccino from your local coffee shop. So, while breaking your smartphone is undeniably inconvenient, leaving your spouse to struggle with mortgage payments, loans and school fees for the price of your daily caffeine fix could prove devastating.
Quantifying the need for life insurance
It can be hard to work out how much life cover you would need for your family. Current levels of expenditure provide a good starting point for making these estimates, and then you would have to consider the other costs that might be involved like child-care, loans, future school fees etc. It can be especially difficult to assess the potential financial impact of the death of a parent who spends most of their time looking after children and the household. A good starting point is to estimate the costs of buying in these services.
Types of term assurance
- Level term polices pay out a fixed sum if you die during the term of the policy.
- Renewable or convertible term policies can be extended for an additional period, while others are convertible to a whole of life or endowment policy.
- Increasing term policies have an element of inflation proofing.
- Decreasing term is like level term but the amount of cover reduces each year. Decreasing term is typically used to cover a liability that you expect to decrease year on year, such as paying school fees until a child reaches the age of 18.
- Mortgage protection is a type of decreasing term assurance but the cover reduces in line with the outstanding capital on a repayment mortgage where you pay off some of the capital every month.
- Family income benefit pays an annual sum if you die during the term of the policy and the payments continue until the end of the term.
- Joint life policies are for situations where you could take out a policy on more than one life.
The right policy
Term assurance, sometimes called temporary insurance, is the right sort of cover for most types of family protection needs. It provides insurance at the lowest cost for the period that it is required. Term assurance is the simplest form of life insurance, working in a similar way to your house insurance. The policy will pay out if you die during the term, but if you survive to the end of the term, the contract simply comes to an end and there is no pay-out. It is rare that you would need other types of life insurance for family protection, because they generally involve much higher costs than term assurance to provide comparable levels of cover.
Ensuring the right people get the money
The best way to ensure that the proceeds of a life policy are paid to the people you intend to benefit is generally to arrange for the policy to be in a trust. The most appropriate type of trust is generally one that gives the trustees discretion or flexibility about how they distribute the benefits, but it is a good idea to get advice about this. If you die, the policy proceeds will be paid to the trustees and then to the beneficiaries, not into your estate. This arrangement should save inheritance tax and speed up the payment to the beneficiaries.
Trusts are not regulated by the Financial Conduct Authority or the Prudential Regulation Authority.
1 Source: UK Insurance Key Facts 2012, Association of British Insurers. Figures relate to 2010, the latest available
2 Source: UK Insurance Key Facts 2014, Association of British Insurers