Seven ways to protect your family
Taking out insurance will not stop the emotional impact of illness, accidents or death, but it will provide money and options at a time when your family needs them.
I see insurance as a promise to your family that funds will be available to provide the life they want if you are not around any longer, or you don’t have the ability to generate income any more.
Here are seven ways to protect your family:
Mortgage life insurance
First of all, most people have a mortgage and it’s more than likely that you want your family to be able to stay in the family home in the event of your death.
If you have a capital repayment mortgage, you will need decreasing mortgage life cover in which the sum insured reduces with your mortgage balance. Alternatively, level term life cover which pays out a benefit as a lump sum if you die within a set period of time, is useful to cover an interest-only mortgage.
Family Income Benefit
Most people forget about the essential expenses a family has after paying a mortgage. It’s no use repaying a mortgage if the family still cannot afford to live in the property. Family Income Benefit Life Insurance is a type of life insurance that pays out a regular income to cover essential expenses such as utilities, food, clothing and non-essential expenses such as school fees and holidays. The amount of cover required depends entirely on your lifestyle and the lifestyle you want your family to have.
Whole of Life
While there is no inheritance tax between married spouses or civil partners, it may become payable if you leave money to your children, or to a live-in partner. Do you want your family to receive a reduced inheritance because of inheritance tax?
One way to reduce the burden on your dependents is to take out a Whole of Life policy, which is a life insurance policy without a set term. This means you can pay a regular premium in exchange for a lump sum when you die, which will be used to pay the inheritance tax.
Writing your policy in Trust
All of the policies mentioned so far should be written under trust. The reasons for writing a policy in trust could include any of the following:
- To ensure that the right person receives the proceeds
- To make sure the proceeds do not form part of your estate, meaning they will not be subject to inheritance tax
- To allow your beneficiaries to have access to the funds before probate is granted.
Critical illness insurance
This is a tax-free lump sum on the diagnosis of a specified critical illness. The top three critical illness claims are cancer, stroke and heart attack. The benefit received could be used to repay or reduce your mortgage, pay additional medical expenses incurred, ensure you receive the best treatment, or to cover your family’s essential expenses while you are recovering.
Many people insure their mobile phone, white goods and the boiler. Yet the financial impact to your family in the event of a claim is usually limited to a couple of thousand pounds. What if you could not work for the next five years or even longer due to ill health? This would have a huge impact on your family’s lifestyle. Income Protection is designed to replace your income in the event you’re not able to work due to illness or an accident.
Most plans come with a ‘deferred’ or ‘waiting’ period, which is the time until the claim is paid (three months is common), with the benefit being up to 60% of your taxable income. There are now different benefit periods available (how long the benefit will pay out for) which include:
- Full income protection which pays a benefit after the deferred period until you go back to work or retire
- Budget-type plans which pay a benefit for a maximum of 24 months, which come with a reduced premium.
It is important to get advice, as protecting your family can be the most important decision that you will ever make. An adviser can help tailor the policies to meet your individual circumstances and goals for your family, select the best package for your requirements, guide you through the process and select the correct type of trust to match your situation. Once a policy has been taken out, you should review it every two to four years to ensure the plan still meet your requirements.
Carl Drummond is a wealth planner at Sanlam UK