Born in India, I was raised by a single mother and it wasn't always easy for her. A school teacher’s salary and three daughters - I can imagine there were a few sleepless nights over financial worries. I do remember clearly my mother drumming it into me, the eldest daughter…‘Should something happen, remember I have my Life Insurance policy so you will be looked after‘. Luckily, we did not need it.
In my professional role as a financial adviser, this experience has stayed with me, especially when I see parents with children. I am very passionate and vocal about protecting the family and ensuring debts like a mortgage are covered if there are financial dependant. Family protection is really the foundation, the rock solid base needed for financial planning.
Of course, a financial adviser can take you to the water, but cannot make you drink. Our role is to make you aware of the facts and inspire you to take action. For me, it is vital to make my client aware of the financial stumbling blocks, advise them on the likely steps and make a recommendation after fully understanding the need. Most clients, upon reflection, will feel like they want to take action.
Life insurance - the principle behind it - is similar to home insurance or car insurance. If you had a valuable, luxurious Bentley for example, you would not insure it for 20 per cent of its value. Nor would you insure your home for half of its rebuild value. That would not make logical sense. Life insurance is about paying ‘pennies’ to cover yourself in ‘pounds’. A monthly premium that provides your family with financial safety, with the lifestyle you would want them to have, if you unfortunately weren't there to make it happen.
Being under-insured when you have a family or have debts can cause a serious financial crisis. If an unfortunate event ever happened to the breadwinner, how would that affect the family? Disastrously most likely.
So, how much cover should one have? What kind of policy do you buy?
There are various methods of working out life insurance such as 10 x annual income, ‘human life’ approach and my personal preference - the ‘needs’ approach. Working out how much life insurance you need is a fairly subjective science and its useful to have a through conversation around this.
TIP: Try out this human life calculator and you may be surprised at your economic worth to your loved ones.
Often, I will encounter a working parent and a stay-at-home parent - it is useful to cover both parents as there is always a financial impact on the family regardless. If the stay-at-home parent was not around, the working parent would need to pay for a nanny/childcare or cut down on the hours worked. Also, both parents may work after the child gets older and there is also potential for loss of income so future plans around employment are worth discussing.
Term assurance with guaranteed or level premiums (no cash payout/investment component) is usually the least expensive, most straightforward way to buy life insurance. Family Income Benefit is a life insurance policy that pays an income to dependants on the death of the insured, payable for the remainder of the policy term.
TIP: Family Income Benefit is usually a cheaper method for family protection than a level term or decreasing term policy as the risk to the insurance company decreases, the further through the policy you get.
With level term insurance plans, a £1 million policy over 10 years will pay out £1 million on death. With a family income benefit policy, this would be £100,000 payable for each year of the policy. If death were to occur at the end of year 1 for example, the policy would pay out a higher sum accordingly than if death were to occur in year 9. Although the cover may seem lower, it does cover the ‘need’ as if the life insured were alive, he or she is around to financially support the family. It is a good compromise when there are tight budgets or a need for high cover but substantially low premiums.
TIP: Best to place life insurance policies in trust to avoid inheritance tax trust in anticipation of the taxes due on the estate. Your financial adviser will be able to assist with this and there is no additional cost to setting up a life insurance trust.
TIP: Also, if you have a hobby such as mountain climbing or a hereditary illness in the family, it is best to check out with the underwriters before policy application as the premiums quoted may not apply.
For family protection plans, some parents prefer to insure until the children are aged 18, 21 or 25. In some cases, the earning spouse may decide to cover the non working spouse until retirement age.
TIP: Remember, if you have no financial dependants, ordinarily, you would not need life insurance.
For a mortgage related protection, the policy would depend on the type of mortgage and term.