Life insurance – protecting the future

As part of our service, your financial planner can ‘stress test’ your finances to ensure your lifestyle is affordable in a range of different scenarios that may occur in the future.

For those that are approaching retirement or are already financially independent, in today’s world you may still have debt, against your main residence or second properties. Although children may have left home, we know that after Covid and with the current cost-of-living crisis, many parents and grandparents are having to financially support other generations more frequently.

We have covered gifting in a tax efficient manner in the past, but this article looks at ensuring your family is protected if you should die unexpectedly.

Everyone is different but we have listed below some of the scenarios we identify from our clients’ financial plans where insuring against your life might be included and the solutions available.

Unbalanced assets

In the past, it was common for one spouse/partner to be the main breadwinner, and often pension provision was not equal.

On death, it is common for a pension to continue to be paid to a surviving dependant although this may often be at a lower level. Our financial planners can help to identify if the projected level of income on death will continue to be sufficient for the survivor’s lifestyle. If there is a shortfall, this is where life cover comes in as it can provide cover to bridge any shortfall so providing essential protection to dependents.

Expenditure

One element of your finances that can be overlooked or not deemed relevant can be your expenditure.

There is a common misconception that ‘budgeting’ or understanding how much one spends a week, month or year is only applicable for lower income individuals or families where money is tight. For those in a ‘healthier’ financial position, the longer-term repercussions of not quantifying lifestyle costs are still worth considering, dealing more with what you want to happen, rather than needing cover.

In later life, the decision may be more about what you want to do for your family. Perhaps leaving them a legacy. While this can be done with the assets you leave in your will, specific amounts can be dealt with by leaving life insurance written in trust to your family members. A life insurance policy can be written on a whole of life basis whereby it provides a guaranteed lump sum on eventual death in exchange for a fixed premium. In this way, it effectively becomes a long-term savings plan with a fixed sum guaranteed to be paid at some point provided the premiums are maintained.

Complicated families

As the number of extended families increases, the beneficiaries you wish to benefit after your death may be varied and be in different family groups.

Splitting your assets to cater for each group may be complicated for you now, as well as for your executors after you are gone. You may like to provide that all of your assets go to one family group while providing support to other members of an extended family by setting up a life insurance policy specifically for this purpose.

Having thought through what you might need life insurance for we can then consider:

1. The level of cover

There are two key elements in assessing the level of cover that is appropriate. The first is any liabilities which we can identify from your financial plan and also, what your desired lifestyle expenses are. We have talked before about understanding your expenditure and you can include payments to your wider family if appropriate, even if they may be ad hoc or infrequent. Common payments include paying school or university fees, lump sums for house deposits or even helping with third party pension payments to provide for eventual retirement.

2. Affordability

One of the issues is affordability. What ‘affordable’ means will vary from family to family and is dependent not only on income levels but on priorities. People have different views on what they are willing to pay for.

Remember that if your life cover is to provide a lump sum to those who survive you, to pay an IHT bill or the like, that you don’t have to pay for that yourself, although you may like to. If it is affordable to your family, they may welcome the suggestion of a policy to cover the tax to pay when you die.

3. Cost of cover

With the cost of life cover increasing typically with age or as health decreases you should try and get cover in place as soon as practically possible if you want it. For many policies taking it out early can cap the cost and if your health worsens the price doesn’t go up.

4. Benefits of using a trust

It is important to have your life insurance policy written ‘in trust’ so that the payments go directly to your beneficiaries and are available much sooner after your death, as assets in trust typically won’t have to go through the probate process.

Set up correctly, a trust can also be tax efficient as life insurance proceeds do not form part of your estate for Inheritance Tax purposes.

Speak to your financial planner if you want to explore this in your own circumstances or please get in touch.