In times of austerity, high, unexplained inflation and wages that do not rise with it, many families live to survive.
Investing into savings plans for their children or opening a pension plan are often a luxury beyond means. One obvious ‘throwaway of money’ is that of life insurance.
Spending money to protect something you don’t want to think about, and , believe for sure won’t happen, seems like a luxury too far. Until its needed.
Do you need life insurance?
If you have dependents who rely on your income to pay the mortgage, feed them, clothe them, or even have a company that would need buying out by the succeeding partners, it is pretty essential.
Check if you have cover within your company. Some death in service benefits are generous and if money is tight, paying twice for the same cover would seem pointless.
Don’t mix up accidental death cover and life insurance. The former is cheap, but only pays out in the event of an accidental death, the probability of which, is a fraction of the normal cause of death. I’ve often heard it said credit cards include free insurance to cover debts but you’ll find that’s on accidental death only.
If you have an old ‘pension term assurance’, be sure to keep it going. Those plans ceased in 2006, but you keep the tax relief and its cost effectiveness as long as the plan is in force. Once stopped you won’t be able to restart another.
How much do you need and for how long?
That’s a bigger question. You should cover all debts and for the length of that debt. In addition, it would be prudent to protect your loss of income to the household.
Calculate how much you save at the end of the month from your net income. Subtract this and the monthly cost of mortgages/debts that will be paid off, and you are left with what needs protecting each month to keep your family living in dignity. That can be protected by a plan that pays out a monthly amount or a lump sum in the event of death.
How long for?
Well, insuring until your children are independent and through education seems prudent, but if your spouse is dependent on you, consider protecting that income for as long as is required. Saving on cost is always an issue so be sure to ask an independent financial adviser (IFA) to look at the best terms available on the market. They will simply run it through a quote system to find the most cost friendly policy. If you already have a plan or bought through a bank, ask for it to be checked with an IFA to see if the premiums are less now.
I’d speak to your employer too. If they don’t have a death in service scheme, it’s a very good idea. It’s cheap for them and free for you. The cost of the insurance to the individual outside thescheme is much higher than within an employee scheme. Within such a scheme an employee does not have to answer medical questions as the scheme simply covers all employees.
The employer’s premiums aren’t treated as a taxable benefit to you, so its tax free. This is considerably better than buying a more expensive premium personally, out of an income that has been taxed and had national insurance taken out.
Furthermore, the employer cost is considered a business expense and can be offset against tax for them.
The benefits are then paid into a trust so there is no inheritance tax payable either. Such schemes can often have bereavement counselling built into them free of charge, providing excellent emotional support for the family.
An employer/director wanting to protect himself outside his company could save himself tax and national insurance by setting up a ‘relevant life’ policy. The employer pays the premium which is tax deductible to the company, personally tax free to the business owner/director, and the benefits are paid free of inheritance tax, capital gains tax and income tax to the surviving family.
About the author
Peter McGahan is Chief Executive of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
Last modified: June 10, 2021