Family Life Cover
Life Insurance Guide:
Dying is understandably not something people want to spend their time thinking about and this is one of the reasons many people may put off taking out life cover; in fact, 1 in 3 people have no cover at all. If you have family or loved ones who would potentially face a financial crisis should you pass away, then it is important to spend some time thinking about taking out a life insurance policy.
A life insurance policy can be used to ensure that your loved ones remain financially secure, can be clear of a mortgage and that they can maintain the type of lifestyle they are accustomed to, should you pass away.
Whilst the money from the life insurance pay-out cannot ever replace a loved one, by taking away some, if not all of the financial pressures, it could be a great help. One of the main reasons that people take out life cover is not for themselves but for their families.
Family Life Cover
Trying to work out a suitable sum assured for your family can be difficult. The first thing people usually look at is what costs they are currently paying out for their children, things such as childcare, school fees and university costs, however there are a number of other things that should be taken into consideration. The day to day living costs when raising a family, gas, water and electric, the mortgage or rent will also need to be covered. If your family rely solely on your wage, then anything that wage pays for should be considered and covered in your sum assured.
Online there are a number of life insurance calculators to help you with your decision on what amount of sum assured that is right for you. The sum assured is usually recommended to be between 4 and 10 times your salary but this is recommended to be discussed with your Proadvice adviser as often it needs to be substantially more.
In many cases we have recommended to our clients to take out a family income benefit plan, rather than a lump sum payment option. A lump sum payment is much harder to budget whereas the family income benefit plan pays out a monthly amount to your loved ones in the event of your death. It is almost like your family will still receive your income if you are no longer around.
If you have death in service at work or a pension with a lump sum attached, if you are to die before retirement you could use the potential pay-out to top up your own insurance plan.
Can Critical Illness cover protect my family?
Critical illness cover can be used to protect more than just your mortgage. A critical illness cover plan can also be used to protect you and your family as the plan will pay out a lump sum if you are diagnosed with a critical illness. The number of listed critical illness conditions varies from company to company with some providers covering 4 conditions and other providers covering up to 160 critical conditions.
Like all critical illness cover, a family critical illness plan will only pay out if you meet the insurers’ correct definition of a critical illness. Every insurance company is different so it is worth speaking to one of our Proadvice advisers to determine which plan will be suitable for you.
In an ideal world you would take out the same amount of critical illness cover as you would life insurance cover, however critical illness cover is more expensive.
Many people opt to take out the two polices together and reduce the sum assured for their critical illness cover. For example you could take out £100,000 of life cover and £20,000 of critical illness cover, rather than £100,000 of life & critical illness cover as this will reduce your premium cost. This then allows you to have an element of critical illness cover at an affordable rate.
The reason for critical illness cover being more expensive than life insurance is that you are more likely to claim on the critical illness plan than on your life insurance policy. The good news is that many people who suffer from a critical illness often survive and are able to eventually go back to work so the critical illness cover can substitute the time that you are off work recovering.
What is Whole of Life Insurance?
A whole of life, life insurance plan is a policy that you pay for however long you live so there is no set term for this plan. Whole of life insurance plans can be used to cover mortgage costs, funeral costs and to protect your family. As a whole of life plan has no expiry date, the cover will pass away. If you set your whole of life plan into trust, it normally means that the pay-out in the event of your death will be tax free. With a whole of life policy, there is the risk that you could pay more into the policy than the policies potential pay-out but this is dependent on how long you live for.
Joint vs Individual insurance?
Many people take out life cover when they are young, fit and healthy, which is ideal as this is the time you will benefit from the lowest premiums available to you. The first inclination to take out life insurance may be when buying your first home. If your partner where to die in years to come and the type of policy you had taken out meant that when the first partner passed away the policy would pay out and then expire, you, the surviving partner may struggle to be accepted for a new life cover policy. For example, many every day conditions such as; blood pressure, cholesterol or other aches and pains that we tend to experience in later life, may influence or even prevent you from being accepted for a new insurance plan.
One way to avoid putting yourself in this situation would be to take out two single insurance plans. Even though the cost for a joint insurance policy is often cheaper, the difference between that and single insurance policies is relatively small and in your best interest as the sum assured figure will more than likely double. Rather than a sum assured of, for example, £150,000 between you on a joint life insurance policy, by having two single polices, the sum assured would now be for two plans at £150,000, (£300,000 in total). With single life insurance policies it allows you or your partner to change their own level of cover as time goes by. Partners are not required to have the same level of cover as each other with two single life insurance plans so the life insurance plans can be customised to suit your individual circumstances. The single life insurance policy also allows people to pay for their own share of their insurance which can be particularly useful if one of you has a medical condition that could affect the underwriting of the policy.
If one of you suffers with a medical condition, you are able to split the cover so that the whole plan is not affected and by having two single policies, it allows the partner with the medical condition to take out a lower sum assured, therefore reducing the premium cost. This allows both partners to take out insurance when previously it may have been unaffordable whereas if you were to opt for a joint policy, of you would be required to be insured for the same sum assured which could prove costly if one of you has a medical condition.
Another benefit of single life insurance policies is that in the unfortunate event that the relationship should break down, it allows the individuals to continue with their life cover separately rather than having to re-apply.
The additional risk to the insurance company with single life insurance policies is minimal as there is the same element of risk with someone claiming on a single insurance plan as there is on a joint insurance plan.
If you are set on a joint policy then there is an option to take out a joint life, second death plan. A joint life, second death plan is normally a whole of life plan and is taken out to cover a potential tax bill on the estate when the second person passes away. There are a number of other uses for a joint life, second death plan, dependent on your circumstances. As it states in the title, the plan will cover both of you but will only pay out when the second person named on the policy passes away. The joint life, second death plan is usually cheaper than opting for a joint life, first death plan.
For example, Mr and Mrs Smith are looking at joint life cover and the total cost for their £100,000 insurance plan is £20 pounds. This works out at £10 each. This £20 is affordable to them.
As Mr Smith suffers from uncontrolled high blood pressure, his life cover would now potentially double his element of the premium, making the premium in total now £30 and therefore making the joint plan insurance too expensive.
In some cases, Mr Smith might now decide not to have any cover at all as it is unaffordable to him and just Mrs Smith will take out a plan for her £10.
One example solution to the Smith’s problem is this;
Mr Smith takes out a life insurance policy with a reduced sum assured of £50,000 at £5 per month, then when Mr Smith’s plan doubles to £10 a month due to his uncontrolled high blood pressure, the Smiths are still within their budget.
Mrs Smith is then able to keep her cover, with a sum assured of £100,000 at £10 per month and they both now have peace of mind knowing that they have life insurance cover and that it is affordable to them.
Another advantage of two single plans over a joint policy would be the ability to choose where the money is paid to in the event of a claim, so who the beneficiaries will be.
Mr Smith and Mrs Smith are married and have three children. They have decided to take out life cover to protect their children in the event of their death. Mr Smith also has a child from a previous relationship and wants to make sure this child is looked after as well as his 3 children from his relationship with Mrs Smith, in the event of his death.
On this occasion, Mrs Smith does not like the idea of Mr Smith’s child from a previous relationship receiving any of her money if she died, which would be the case on a joint plan. Mrs Smith only wants the money to be paid out to their 3 children.
By taking out two single plans;
If Mrs Smith were to pass away her 3 children would benefit from her life insurance plan. 100% of the pay-out would go to their 3 children and no-one else.
If Mr Smith were to die, he can leave his sum assured to all 4 of his children, so in this case they would each receive 25% of the sum assured.
This way both parents can ensure their children are being looked after without taking something away from their own benefit.
(Please note that costs and sums assured in the example are hypothetical and for illustrational purposes only.)