Have You Got Your Family Insured?
November 6, 2018
No one likes to consider what would happen if they were no longer around to support and provide from their family. When we’re in our 20s or 30s many people think life insurance is just for older people and simply not relevant. In reality, this is generally the ideal time to take out family life insurance, allowing you to lock in very low monthly premiums. In fact, you could secure cover for less than 20p-a-day, providing financial protection for many years. The reason being, insurers price premiums are based on the level of risk you pose. Therefore, if young and healthy, you’re statistically far less likely to make a claim.
Questions you may be asking yourself:
- What policy options are available?
- What’s the most cost-effective cover?
- How do policy types differ?
- How much life insurance cover do you need?
- How long do you need cover protection?
We asked the award-winning life insurance broker Reassured to help explain the available options.
Life insurance options
Generally speaking, when you have a young family life insurance policies are more suitable than life assurance. What’s the difference? Well, life insurance pays out if you die during the policy term, whereas life assurance pays out when you die.
Examples of life assurance include a guaranteed over 50s plan and whole of life assurance. These policies are more expensive and better suited to an older demographic, who want a guaranteed payout to cover rising funeral costs or leave an inheritance.
Life insurance is commonly used to protect your largest financially investment; the family home and children’s living costs for a specified time period (or term). For example, until the children have left home and are independent or until the mortgage is paid off.
This means life insurance is better suited to young families and is significantly cheaper. However, it’s possible to outlive your policy.
Decreasing term life insurance (sometimes referred to as mortgage life insurance) is the most cost-effective option. It’s usually taken out specifically to cover a repayment mortgage. As the amount you owe on your property decreases, so does the policy payout. It’s common for the policy term to mirror that of your mortgage term. So, you would have a 25-year life insurance term to align with your 25-year mortgage. If you only need to protect your home, then fine – but if you have children and need to factor in future living costs too you may require greater coverage.
Level term life insurance, all things being equal, is more expensive than decreasing term. Although, here the payout amount remains fixed for the duration of the policy. Whether you pass away one month or 19 years into the policy term the payout remains the same, (or level). You could, therefore, set your cover amount to clear the mortgage, meet future living costs and/or provide an inheritance. If you have an interest-only mortgage, where the capital borrowed doesn’t reduce over time, then level term cover may also be suitable.
Family income benefit
Family income benefit, or FIB, is a less well-known option which could meet your needs. Instead, of paying out a cash lump sum like level and decreasing cover, family income benefit pays out a regular monthly income. Effectively replacing a lost salary. If you have a young family the reassurance of a regular income may be more suitable than managing one large lump sum payout. Why? Well, a large lump sum often requires careful management, long-term budgeting, possible investment (which could involve professional fees or tax liability). FIB may make it easier for a family to budget.
Again, this option is term-based and generally very cost-effective. For example, if you secure £2000 a month for a 20-year term and pass away 5 years into the policy, your dependents will benefit from 15 years’ worth of monthly payments.
Joint life insurance
If you’re in a relationship you may be tempted to take out a joint life insurance policy. This will usually save you around -25% on your premiums compared with 2 individual policies. However, the important thing to understand here is that a joint policy will only ever pay out once, normally upon the first death. 2 individual policies provide double the coverage and 2 separate payouts. Also, if you have a joint policy and one of you passes away, the policy then expires. This leaves the remaining partner with the job of securing a new policy when older and thus more expensive premiums.
Budget permitting, it’s possible to take out more than one policy, to meet different needs. Perhaps you want a decreasing term policy to protect your family home, as well as FIB to meet future living costs. Also, think about any employee benefits, as some jobs offer death in service. If you enjoy this benefit and pass away whilst in the job, your loved ones could receive 3x your annual salary. You should factor this into your cover amount. As a general rule, the greater your cover amount, the higher your premiums – factoring this in could help bring down costs. It’s important you remember though, if you change your employer you’ll not be able to take this benefit with you.
Write life insurance in trust
Most people are unaware of writing your life insurance in trust, only 6% of policyholders do it. However, doing it could massively benefit your loved ones financially. You could avoid 40% inheritance tax and the probate process entirely, (which usually takes 6-9 months, but can take years). Writing your life insurance in trust means the policy’s proceeds avoid forming part of your legal estate, (which is subject to heritance tax). Anything over £325,000 is currently taxed at 40%. Therefore, if your property is worth £250,000, assets £20,000 and your life insurance £150,000, this could mean quite a saving – (£38,000 to be exact). What’s more, insurers offer this feature free of charge. The main issue for many is the lengthy application forms involved.
At Reassured, we provide a free trust service, offering you support and guidance throughout the application process.
Key life insurance considerations:
- The size of your mortgage debt
- How many children you have
- The age of your children, (how long until they’re financially independent)
- Whether you have personal savings
- Whether your partner works
- Do you have cover protection through your employer
- The cost of childcare.
Benefits of life insurance:
- Provide a financial safety net for your children
- Ensure your family can maintain their current standard of living
- Cover your mortgage/protect your home
- Replace a lost income
- Cover day-to-day living costs
- Cover household bills
- Fund childcare costs
- Provision for your children’s education
- Provide an inheritance.
Secure the right cover, at the best price
Once you decide on the most suitable policy type for you and the level of cover you require, the final challenge is to secure the right policy. The best way to achieve this is to compare multiple quotes, as premium prices can vary significantly. You can do this yourself online, but this can be very time-consuming. Alternatively, you could use a comparison website – although some insurers will be excluded from the results.
Lastly, there is the option of using an FCA registered life insurance broker.
A broker could be a good option for you because generally there’s no fee to use their service and they compare all the major insurers. Basically, get them to do the hard work for you and just choose the best option to protect your loved ones.