All parents want to see their children grow up and flourish. The thought of not being there, and the impact that would have on them, is almost too unpleasant to bear.
Yet I want you to imagine it. One in 29 children – a typical class size – lose a parent before they grow up. I was one. And on top of the horrendous destructive grief, as prosaic as it sounds, there are often serious financial considerations too.
When I meet a new parent, at my TV roadshows, they often ask me about saving for their children. After congratulating them, and answering, I always ask if they’ve got life insurance. It is a crucial but often overlooked financial consideration. And we need to override the emotion and examine it clinically.
Life insurance is an insurance policy you take out that’s designed to pay out a lump sum when you die – usually either to clear debts, or provide money to live off.
There are three main types of policies (other than investment-type life assurance plans):
1. Level term life insurance – this pays out a set amount if you die during a set time.
2. Mortgage decreasing-term life insurance – this aims to clear your mortgage. So as your mortgage debt drops with time, so does the amount it’d pay out.
3. Whole of life insurance – the policy is mainly about mitigating inheritance tax costs.
The cheapest, easy way to protect your family is level term life insurance.
With level term insurance you pay a monthly premium and it pays out a set amount if you die within a set period of time, for example £200,000 if you die within the next 20 years. The more cover you get and the longer the term you want, the more you’ll pay.
And as there’s usually little dispute over whether someone is dead or not and the payout is fixed then, providing the company is reputable, it’s usually just a case of the cheaper the better.
The aim is to have enough cash to cover the lack of income if you’re gone. So if you’ve no partner or children who need the money don’t bother. If you do need cover, it’s important to consider the financial impact if you died.
Aim for a lump sum that’s enough to repay any outstanding debt (including a mortgage if you don’t have a separate policy), and provide for outgoings your dependants would have.
In a couple, even if the one who died wasn’t the main earner, there can be serious knock-on effects. Perhaps the higher earner would need to give up some work or pay for childcare. That’s why a rough rule of thumb is to cover ten times the main breadwinner’s income.
Yet you don’t need to stick with that. You may have “death in service” cover from your employer, which can reduce the amount you need. Yet if all that’s expensive, just cover what you can afford.
Shortening the term cuts the cost, though generally you’d want cover that lasts until children have finished full-time education.
Those who’ve had serious medical pre-existing conditions, and smokers, pay more for cover – put bluntly, this is because you’re more likely to die within the term. If you already have life insurance and have been nicotine-free (including e-cigarettes and patches), it could be worth seeing if a new policy would be cheaper – provided you haven’t had a serious medical condition meanwhile.
Never think of life insurance as a monthly cost. You may be paying it for 20 years, so every £1 a month cheaper is a saving of £240. For full help finding the cheapest policy see www.mse.me/lifeinsurance, but in brief:
– Beware going direct to an insurer, it’s a competitive market, you need to ensure you’re finding the cheapest.
– Even comparison sites can be over-expensive. They may find you the cheapest policy, but they usually also take a huge whack of commission from the insurer.
– If you don’t need advice, use a discount broker. Here you pay a fee of £25-ish, but they rebate all the commission into your policy so it can be £1,000s cheaper. Discount brokers include www.cavendishonline.co.uk, www.moneyworld.com and www.money-minder.com, who will all price match if you find it cheaper elsewhere.
– If you do need advice (and getting it right is important) use an advisory broker or Independent Financial Advisor. While they take the commission, at least they’re doing something for it. You can find an IFA at www.unbiased.co.uk and www.vouchedfor.co.uk, or big advisory brokers include www.lifesearch.co.uk and www.lifeassureonline.co.uk.
A life insurance policy is yours, so if you die the pay-out forms part of your estate and would be liable for inheritance tax.
However if, when getting out a policy, you write it “in trust” to your dependents, it is paid directly to them so inheritance tax isn’t due, and the money is likely paid out more quickly.
Most insurance policies include the option (and papers) for writing in trust directly at no extra charge. If you know what you are doing, you can write the policy in trust yourself. If not, get advice.
Martin Lewis is the Founder and Chair of MoneySavingExpert.com. To join the 12 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip.