Strategic Insights | Do I need life assurance?
Let’s talk about death
Life is full of nasty surprises: tax bills, tooth decay, jury service, dry rot, subsidence… the list is long and harrowing. Worse, many of those nasty surprises often involve hefty financial outlays or loss of income. So people are always pleased to chance upon a pleasant surprise… such as a tax rebate or a lottery win. Similarly, our clients are often quite delighted when the conversation turns to life assurance during their financial review meetings with us and they find out just how inexpensive it is.
You may try and sugarcoat it with euphemism and metaphor, but fundamentally… inevitably… any conversation about life assurance ends up being a conversation about death – usually your own. And death – like taxes – is one of life’s certainties. So if you would like the peace of mind of knowing that a lump sum will be paid out to your beneficiaries no matter when you die, then talking to us about life assurance might end up being one of your better decisions for those you care about the most.
Financial security for your family
With families come responsibilities. The most common reason for purchasing a life assurance plan is to ensure that children or spouses are financially secure in the event of a parent’s / partner’s untimely death. This is particularly important when children are young. Beyond simply ensuring that the principal earner has life assurance, it is important to make sure that the family could survive in the event of the children’s primary caregiver dying as well. IQ can help you select a policy that will keep your family free of the anxiety of debt, while ensuring that your spouse is able to maintain his or her standard of living… should the unthinkable happen.
Undervalue your spouse at your peril
Don’t make the mistake of undervaluing your spouse – simply because he or she does not go out to work every day. Should they die unexpectedly, as the surviving parent, you might find yourself having to make drastic changes to your work-life balance to look after your children or pay for childcare. You might even have to give up work altogether. Whatever you do, it could end up being extremely costly. The type of childcare you need will obviously depend on the ages of your children, and spending some time determining the cost of putting that care in place will help you work out how much life assurance you will need for that particular purpose.
You may also take out a life assurance policy to cover the cost of school fees. The death of the principal earner could render school fees (as well as university tuition and associated expenses) unaffordable. A pay-out would ease that financial burden at an emotionally challenging time.
Pay off your debts after you’ve gone
If you have a mortgage, a life assurance plan would cover the outstanding debt that you owe to the bank. And in these debt-ridden times, when more and more of us have personal loans, credit card bills and other financial obligations, many people turn to such plans to ensure that these personal debts are not passed on to their family.
Most people would agree that if you have anyone (dependents, a non-working spouse…) who would be financially disadvantaged by your death, or who would have to sell your family home because they would not be able to keep up mortgage repayments, or who would be liable for the cost of bringing up your children… then life assurance should be a priority for you.
Indeed, if you have any form of financial responsibility to someone else, subscribing to a life assurance plan could be an extremely smart move. There are, obviously, some exceptions to this. You may have no debt, you may be lucky enough to own your house outright, or you may have significant savings or other sources of capital or income that your beneficiaries might be able to access in the event of your death.
Beat inheritance tax
However, if you are particularly moneyed, life assurance is still useful as a strategy for reducing the impact of inheritance tax on your beneficiaries. Furthermore, pay-outs are extremely fast: it takes time for bills to be settled, and probate can sometimes take many months or even years. Life assurance could give your family quick, relatively admin-free financial security at a time when they need it the most.
In most cases, the minimum amount should be enough to settle outstanding debts and cover funeral costs, but the amount of life assurance you need will depend entirely on your specific circumstances.
Even if your partner could continue working, it might still be a good idea to talk to us about which types of life assurance policy would enable your family to maintain the lifestyle to which they have grown accustomed. And in the short term, it may be preferable for your grieving partner not to have to go to work at all so they can come to terms with your death and make the necessary changes to their lifestyle to cope with their loss. This would be particularly important if you were to die unexpectedly.
More often than not, policies make lump sum pay-outs. So you will need to spend some time determining exactly how much life assurance you should have in place. But if you are specifically looking for a direct replacement for lost income in the event of your death, a family income benefit plan may be an appropriate alternative to a standard lump sum-based plan. The pay-out will principally be determined on the basis of your net salary and the number of years over which it will be required.
Protect your business
There are also business interests that you might like to consider.
If you own a business, then you could talk to us about life assurance-based shareholder protection plan as a safety net. This way, if ever your business were to lose a shareholder through illness, injury or death, then the remaining partners would have the necessary funds to buy shares from one another.
The sum insured is usually based on the amount of capital the remaining partners would need to buy out their outgoing colleague’s equity in the company. The amount the business would need to pay in premiums depends on the level of risk the insurer thinks they are taking on by providing the cover. Much like a standard life assurance policy, this is calculated based on the insured person’s age, lifestyle and whether they have any pre-existing health conditions.
We have so many weasel words and expressions in our language to avoid talking about death. Some are intended to amuse, while others are intended to downplay how upsetting a time it can be. Bereavement is indeed one of the worst challenges we ever have to face. If you do not already have cover, next time you check in with us to discuss your financial plan, consider reviewing your individual circumstances and the kind of protection you would like your loved ones to have. When you consider that the average cost of life assurance in the UK is between around £15 and £30, not allowing us help you undertake a little basic research into it really does seem like a wasted opportunity.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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