Financial Planning

Family financial planning: Do I need life insurance & income protection?

17th August 2021

Having an appropriate level of insurance protection in place is a key part of your family’s financial plan. Both life insurance and income protection insurance can offer security to your family should those worst-case scenarios happen. Here, we explore the different types of cover and what these types of insurance can do to support you and your family.

There are three key areas where insurance protection can be invaluable:

  • Providing for your family in the event of your death
  • Providing for you and your family if you are unable to work
  • Paying a future Inheritance Tax bill

Life insurance: Why you need it and what does it protect?

Life Insurance pays out a tax-free cash lump sum to your loved ones should you pass away.

Sadly, the grief of losing a loved one is often compounded by a loss of income which can often cause a financial crisis. Life insurance is one of the lowest cost ways to protect your family’s finances if the worst happens.

We all have a natural tendency to hope that something unexpected won’t happen to us, but sadly the statistics are quite sobering:

  • A parent of children under 18 dies every 22 minutes in the UK, around 23,600 a year
  • You are six times more likely to pass away before retirement than most people think
  • More than one in six people said that their loved ones would have to sell the family home to survive if they passed away.

You can also opt to include Critical Illness Insurance for an additional premium to offer a pay-out should you suffer a serious illness such as cancer, and the statistics do again highlight the need to consider all possibilities:

  • 1 in 2 people in the UK will get cancer at some point in their lives and 2.5 million people in the UK are living with cancer. (Cancer Research UK).
  • Every 7 minutes, someone in the UK will have a heart attack and 1.5 million people are living with the after effects of a heart attack. (British Heart Foundation).
  • Over 100,000 people are living with MS in the UK with symptoms usually starting between age 20 and age 40. (MS Society).
  • Every year in the UK, over 100,000 people will have a stroke and more than 1.2 million people in the UK are living with the after effects of a stroke. (Stroke Association).

Two of the most common uses of Life Insurance include covering an outstanding mortgage balance, allowing your loved ones to stay in the family home should you pass away and using Life Insurance to provide financial security for your family after your death. A combination of the two is of course also possible, depending on your needs.

How much does life insurance cost?

The cost of Life Assurance will depend on a number of different factors, with the main ones being;

  • How much you choose to insure your life for
  • How long you want to insure your life for
  • The sort of life insurance policy you choose
  • Your current state of health and any pre-existing medical conditions
  • Your smoker status.

Assuming an individual insures themselves for £250,000 of level life insurance (this means the amount of insurance and premiums would stay the same for the duration of the policy) over 25 years, and has no untoward medical history, the monthly premiums for a non-smoker would be approximately;

  • Age 30 = £9.55 per month
  • Age 40 = £18.14 per month
  • Age 50 = £44.63 per month

You might agree that this could be a small price to pay for providing yourself and your family with peace of mind and financial security.

Alternatives to life insurance

If you want to provide a regular income for your family rather than a lump sum (for example, to cover private school fees), an alternative is to take out an insurance product called Family Income benefit. This provides an annual tax-free payment for a set period.

You should also consider putting the life insurance in Trust to avoid benefits being delayed by probate and to avoid exposure to Inheritance Tax (IHT) in some cases. This is one of the best ways to protect your family’s future in the event of your death. Your life insurance policy is a significant asset, and by putting life insurance in Trust you can manage the way your beneficiaries receive their inheritance.

Income Protection Insurance: Why it’s a good idea

More people have Breakdown Cover (50.5%), Pet Insurance (29.5%) and Mobile Phone Insurance (19.1%) than Income Protection (10.1%). This is despite a person’s income being what pays for their cars, pets and phones!

Income Protection Insurance is designed to replace a proportion of your monthly income should you suffer an accident, sickness, or unemployment that prevents you from working. The benefit is paid tax free and allows you to keep up with all your essential core expenditure, protecting your lifestyle for the rest of your working life right up until your expected retirement age.

Recent statistics have found that the risk of being out of work is much higher than many people might assume, with 14.7% of the over 55’s having been out of work for at least 6 months at some point during their careers.

How much does income protection insurance cost?

The average cost of an Income Protection policy for a non-smoker in good health, providing a tax-free benefit of £1,500 per month until age 65 with an 8-week deferral period is as little as;

  • Age 25 = £26.77 per month
  • Age 35 = £39.13 per month
  • Age 45 = £56.35 per month

There are certain lifestyle events where we tend to take on more responsibility and realise just how important it is to protect our salary should we suffer an illness or injury.

Buying a home

Our home is usually our most valuable asset and many of us spend the majority of our working lives paying off a mortgage. To ensure that you can keep up with your payments even if you are unable to work, it is worth considering an insurance policy to protect your salary. Without a regular income, there is a risk in the event of ill health that you may not be able to afford to make payments and could potentially lose your home.

Changing jobs or getting promoted

If you already have Income Protection when you are promoted, you may want to increase your policy’s cover to match your new salary. If you do not have a policy yet however, getting a new job is a great time to take out a policy, tailoring it to step in and protect you when any employer provided protection or sick pay stops.

Becoming self employed

Income Protection is especially important for the self-employed. Without any sick pay to fall back on, the self-employed are particularly vulnerable if they cannot earn an income.

Birth of a child

Having an extra dependant join the family who will rely on your salary is another reason to make sure your income is adequately protected.

So, what should I do?

When looking to protect your income, the first step should be to consider how much you need to fund your day-to-day lifestyle and maintain your standard of living in the event you are unable to work through sickness or illness. This will give you an idea of the level of protection you need and can be reviewed against any protection already in place from your employer and/or the state. Any gaps could then be fulfilled by an Income Protection Plan.

When looking to protect your family and dependents in the event of your death, it is important to consider whether there are any liabilities such as mortgages or loans that will need to be repaid. Are there any other considerations (for example school fees) that you would want to ensure could continue to be financed, and is Critical Illness cover a concern to you? You may feel that it would be beneficial for your family to receive a lump sum or regular income to help meet their day to day living costs as well as repaying any financial commitments.

As independent advisers we are able to search the entire protection market for the best policy for your needs at a competitive price. To find out more and talk with one of our expert financial planners, get in touch with us here.