When it comes to exciting financial purchases, life insurance is never going to top the list. Most of us would rather bolster our investment portfolio, look at buying a rental property, or improve our pension provision.
But it is vital if your loved ones depend on your financial support for their livelihood.
Go back in time, and you’ll find life insurance was the mainstay of a financial plan – the first thing you did. But the latest figures from the Association of British Insurers suggest that many households no longer see it as a must-have.
They show that only six million households have some form of life or income insurance in place, compared to 19 million that have home contents cover.1 In other words, two-thirds more households seem to value their TVs, smartphones and vinyl collections over themselves. Which would your family miss most?
For some it is the cost, or perceived cost, of insurance that puts them off. But for those who have it, the cost of a simple term insurance policy may only be a couple of pounds a day – less than the price of a skinny latte from your local coffee shop.
So, while breaking your smartphone is undeniably inconvenient, leaving your partner to struggle with the cost of raising the family, mortgage payments and loans for the price of your daily caffeine fix could prove a much bigger problem.
Life cover can appear an intimidating topic. So unsurprisingly, many people struggle to understand the difference between life assurance and life insurance. The main difference is that life insurance covers you for a set term, whereas life assurance covers you for your whole life. That’s why life assurance is often known as ‘whole of life’ cover.
You will have probably seen whole of life policies for older people advertised on day-time television or have received mail shots through your letterbox from an insurer selling over-50s plans to cover funeral costs.
But these plans can do much more than simply cover funeral costs. They can pay off a mortgage or other loan. They can protect against the early death of a spouse, partner or parent – particularly important for people with financial responsibility for children. And they can be used to help cover the cost of an Inheritance Tax (IHT) bill.
The decision whether to go for life insurance or life assurance will depend on your individual circumstances and the type of protection you are looking for. Irrespective of which type of policy is right for you, make sure you get cover as young as you can, because it will typically be cheaper.
Trust issues
The best way to ensure that the proceeds of a life policy are paid to the people you intend to benefit is to arrange for the policy to be put in a trust. The most appropriate type of trust is generally one that gives the trustees discretion about how they distribute the benefits, but it is a good idea to get advice about this.
If you die, the policy proceeds will be paid to the trustees and then to the beneficiaries, not into your estate. This arrangement should speed up the payment, but crucially, it avoids the proceeds falling into your estate and worsening an IHT problem.
Life insurance protects your heirs from the unknown and helps them through an otherwise difficult time of loss. So, if you’ve got children or other dependants or a mortgage to pay, then make sure you discuss your protection needs with a financial adviser. They can consider every aspect of your situation and find you the right policy.
It could be the most important conversation you ever have.
Trusts are not regulated by the Financial Conduct Authority.
1 Association of British Insurers, 2018v
My motivation is to help individuals and businesses understand more about their money and how it can be used to grow and protect their wealth.
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