Protecting you and your estate
If you’re reading this it’s probably because you play a major part in providing for your immediate family. You may have a husband, wife or partner, children and other family members; you may be the person who keeps a roof over their heads, provides heating and lighting, food and clothes, holidays, entertainment, mobile phones, education, finance – they’re financially dependent on you.
But what would happen if you suddenly died? The income you provide would immediately stop – where would that leave them? Apart from losing you, the change in their financial circumstances could be life-changing.
The purpose of life insurance is to make financial provision for your dependants in the event of your death by insuring a sum of money against your life. Although the money your dependants receive will never replace you, it could provide them with a financial lifeline and a more secure future.
There are many types of life insurance and it’s important to choose the one whose ‘features and benefits’ meet your individual circumstances and needs. There are two broad alternatives – ‘term insurance’ and ‘whole-of-life insurance’ – each offering a variety of options.
This is the simplest and most popular type of life insurance. You decide on the value of the cover you want and the length of time you want it for; you then pay a regular premium for the duration of the term. If you die within the term the policy pays a lump sum; if you don’t die, the policy expires when the term ends. The most common options are:
- Level term policies
These pay a fixed lump sum if you die within the policy’s term, which means you know exactly what your dependants are going to get. The premium is also fixed for the duration of the term so you know exactly how much you’re going to pay. However, a disadvantage is that what could be considered a ‘sizeable sum’ at the start of the term may be ‘next to nothing’ twenty years later.
- Increasing term policies
These take into consideration what could be a significant decrease in the payout due to long-term inflation. The sum insured either increases by a fixed amount or in line with the Retail Price Index – however, as the sum insured increases, so does the premium you pay.
- Joint-life policies
It’s becoming more usual for couples to take out a joint-life policy. Although this is less expensive than having two separate life policies, one for each party, joint-life policies usually pay out only on the first death during the term.
- Family income benefit policies
These pay a monthly income from the date of the claim to the end of the policy term. Although it will provide ongoing financial support, it wouldn’t be sufficient to allow your dependants to pay-off a major loan like a mortgage.
- Decreasing term policies
The sum insured decreases with time as does the cost of the premium paid. It’s a common method of providing protection for a repayment mortgage (where the loan’s value reduces each year).
- Renewable term policies
The policy’s term can be extended when the original term agreed finishes.
- Convertible term policy
These allow policyholders to convert their term policy into a whole-of-life policy.
This offers protection over the entire life of the policyholder and guarantees a lump-sum payment when they die. Premiums usually finance two separate components within the policy – a life insurance policy and an investment fund – the idea being that any investment profit helps cover the cost of the life insurance which rises with age. Most whole-of-life policies guarantee that the premium won’t change for the first ten years, however, if you’ve taken out a ‘renewable’ policy then the cost of the premium may increase considerably when you come to renew it. ‘Non-renewable’ policies have fixed premiums which, to compensate for the inevitable rise in costs during the long term of the policy, are generally much higher than those in an equivalent renewable policy.
- Non-profit whole-of-life policies
These are very similar to level-term policies in that there’s no investment element, the premium is fixed as is the value of the lump sum payout.
- With-profit whole-of-life policies
This type of policy does have an investment element which means the payout may be boosted by any investment profit that has accumulated. However, the stock market is volatile and there is no guarantee of this happening – in fact poor performance has reduced their popularity.
- Over-50 plans
Although the premium is usually fixed for life, the payout is relatively small, generally up to about £2,000. Over-50 plans are often designed to cover funeral costs.
These are investment plans bought from a life assurance company that are set up as a regular savings plan which, after a set period, pays out a lump sum. The policy includes an integral life assurance element which pays out if the policyholder dies before the term expires. There are a variety of different types of endowment policy including those ‘with profits’ or that are ‘unit linked’.
Endowment policies were popular in the days of interest-only mortgages; the concept being that the investment fund would grow so that it could be used to repay, or partially repay, the capital element of the loan when the mortgage term expired. However, their popularity has declined over the years, partly because of poor performance and partly because interest-only mortgages have become less popular.
Life insurance as an employee benefit
Life insurance is often called a ‘death-in-service’ benefit if it is offered as part of an employee benefits package. Death does not need to happen while the person is at work or be as a result of their carrying out their work, they have only to be employed by the employer who provides the benefit at the time of their death. Death-in-service cover usually pays out an easy-to-administer lump sum although death-in-service pensions are available.
A relatively little-known life insurance policy is ‘relevant life cover’ which uses pension legislation introduced in 2006 to provide a tax-efficient life insurance policy for company directors or high-earning employees.
Having life insurance cover is not seen as a taxable benefit by HMRC so your personal tax allowance is not affected. Although a lump sum payout is tax free, payments from a death-in-service pension are treated as taxable income.
For more information about life insurance when offered by an employer, please visit our section on employee benefits.
How can One Financial Solutions help you?
‘Hope for the best but plan for the worst’ is a common maxim – but many of us just ‘hope for the best’ and then don’t do any planning at all.
One Financial Solutions is here to help you. As a firm of independent financial advisers we can provide impartial advice to help you identify the potential risks you face and develop a strategy that provides protection from their consequences. We’ll recommend the best products from across the whole of the financial services market and help put in place the safeguards you need to protect both you and your dependants.
We can also provide a comprehensive estate planning service to complement the financial advice we give you. Helping you preserve everything you’ve worked so hard to achieve and ensure that it’s passed on to who you want is a natural extension of what we do.
So, if you’re looking for help with any aspect of protecting either yourself or your estate, please call us on 020 3714 9565 or ask us to call you by sending an email to firstname.lastname@example.org.