28 Feb Protecting your family
Photo by Dimitri de Vries on Unsplash
There seems to be an ever-growing number of adverts suggesting we all take out life cover for what seems like a ridiculously low cost and a ‘free pen’!
But what about your family? Are they adequately protected should you or your partner die? What would your partner do if the earnings you contribute to your family stopped? What would you do if your partner died? Would you need funds for child care so you could continue to work?
The reality is that we should ask these and other similar questions of ourselves and our partners.
Often, I see couples who have started pension planning and investments, such as ISAs, but have never considered these types of questions. They may have life cover through work or for their mortgage but nothing else.
When creating a financial plan and implementing it, consideration should also be given to protecting existing and future expenditure for the family. It is pointless starting a savings plan to meet future objectives and then not consider how to provide for everyone’s needs if something were to go wrong now.
I have previously written about the importance of disability income protection but what about life cover?
The death of yourself or your partner is statistically a low probability event but it could have a high impact on your loved ones.
If you have not yet reached financial independence and still have dependants, you will probably need life insurance to replace the future earnings which would disappear following your death, or to provide a means to keeping earning if the main home maker has died.
A simple and cost effective way to replace loss of income or to provide a sum to cover childcare is to use an insurance policy known as family income benefit (FIB).
FIB is a variation of a term assurance policy that pays a lump sum if the person insured dies within a time period specified at outset. A FIB policy has a fixed term or end date but instead of a lump sum payment, it provides regular payments (free of income tax) in the event of death until the end of the agreed period of cover.
FIB offers very good value protection for those people with earned income which they want to replace in the event of their death and where they do not wish, or have insufficient resources, to self-insure.
It also avoids the need for your partner to have to invest the proceeds to generate adequate cashflow and therefore keeps things simple at what may be a very difficult time for them. Another benefit is that FIB policies are likely to be cheaper than an equivalent lump sum term insurance with the same term because the insurance company’s liability gradually reduces over time.
Take a 20-year level term assurance policy of £250,000. If the insured person died after 10 years, the insurer would still have to pay out £250,000. For a 40 year old male, in good health, this would currently cost c.£160pa.
With a 20-year FIB policy with £12,500 of annual benefit (£250,000 over 20 years), if the insured person died after 10 years the insurer would only pay out about £125,000, as half of the policy term would have expired. This policy, also for a 40 year old male in good health, would currently cost c.£105pa.
Obviously, the main downside of a FIB policy verses a lump sum life cover is that less benefit is paid out the nearer you get to the end of term.
The sum assured under a FIB policy can be arranged on a level basis or to escalate by a predetermined amount, such as in line with changes in the Retail Prices Index or by 5% a year.
Even if you are financially independent (not needing to work) FIB might still be useful as part of an overall estate plan, particularly if you have agreed to fund the education of family or friends or have other regular financial commitments, such as child maintenance payments, that you would like to continue in the event of your death.
Life cover is important especially for those left alive, but it does not have to cost an arm and leg or come with a ‘free pen’. Consideration of life and disability needs should be part of all good financial plans. If you are considering protecting you and your family, I suggest reviewing all the options and seeking professional advice.