Putting protection back on the table
Protecting yourself and your family is just as important as investing money for the future.
When it comes to exciting financial purchases, life insurance is unlikely to top the list. Most of us would rather bolster our investment portfolio, buy a rental property or improve our pension provision. But it is vital if your loved ones depend on your financial support.
Life insurance was once the mainstay of a financial plan, the first and most important cover to have in place. But the latest figures from the Association of British Insurers suggest that many households no longer see it as a must-have. They show that only six million households have some form of life or income insurance in place, compared to 19 million that have home contents cover.1
On the surface, this would suggest that two-thirds more households seem to value their TVs, smartphones and vinyl collections over themselves. But for many it is the cost, or perceived cost, of life insurance that puts them off. However, the cost of a simple term insurance policy may only be a couple of pounds a day – less than the price of a skinny latte from your local coffee shop.
Breaking your smartphone is undoubtedly annoying and inconvenient. But leaving your partner to struggle with the cost of raising the family, mortgage payments and loans is undeniably a much bigger problem.
Life cover can appear an intimidating topic. Many people struggle to understand the difference between life assurance and life insurance. The main difference is that life insurance covers you for a set term, whereas life assurance covers you for your whole life, which is why it is also known as ‘whole of life’ cover.
You have probably seen ‘whole of life’ policies for older people advertised on day-time television or received mailshots from an insurer selling over-50s plans to cover funeral costs. These plans can do much more than simply cover funeral costs, they can also pay off a mortgage or other loan, protect against the early death of a spouse, partner or parent and help cover the cost of an Inheritance Tax (IHT) bill.
The decision whether to go for life insurance or life assurance will depend on your individual circumstances and the type of protection you are looking for. Irrespective of which type of policy is right for you, try to get cover as young as you can because it will typically be cheaper.
The best way to ensure that the proceeds of a life policy are paid to the people you intend to benefit is to arrange for the policy to be put in a trust. The most appropriate type of trust is generally one that gives the trustees discretion about how they distribute the benefits. If you die, the policy proceeds will be paid to the trustees and then to the beneficiaries, not into your estate. This arrangement should speed up the payment, but more importantly, it avoids the proceeds falling into your estate and worsening an IHT problem. It is a good idea to get advice about this.
Life insurance protects your loved ones from the unknown and helps them through an otherwise difficult time of loss. If you have children or other dependents, then discussing your protection needs with a financial adviser will be highly beneficial. They can consider every aspect of your situation and find you the right policy. It could be one of the most important conversations you ever have.
Trusts are not regulated by the Financial Conduct Authority.
1 Association of British Insurers, 2018