In an all too complicated world life insurance is one of my least written about areas but it is fundamentally one of the most important tasks a family should make sure they 'get right'.
In the last year I have had three people close to me pass away, all under the age of 50, and in certain situations the life insurance may not have been to the correct level. I'll cover how much I believe you should have, how to write your life insurance and which plans are best.
I have often asked people how much money they would need to win on the lottery to give up work. Invariably it is around the Â£3m mark. No surprise really. However, most people's life insurance is only a fraction of that. How can there be such a disconnect when the outcome is often going to be the same – i.e. an income is lost.
The simplest approach to analysing the amount of life insurance you need is twofold:
Calculate the debt you would need to repay in the event of a death and make sure that is protected fully;
Calculate the disposable income that would be lost in the event of death and protect that with a plan that either pays out an annual income or a lump sum.
An annual income plan is often cheaper. It is called a family income benefit plan and you simply decide how long you wish the cover for, coupled with the amount, and then set the plan up appropriately. A lump sum is often the most common method people use but is more expensive to achieve the similar objective. Furthermore, the beneficiaries, i.e. those who survive the deceased, have the stressful job of investing the lump sum they receive to achieve their objectives. In this instance the survivor will receive a lump sum but may not be able to turn that into a secure income without taking risks they may not be comfortable with. So it's worth considering the upside and downsides of these two options with an independent financial adviser.
It is also worth considering writing your life insurance policies into trust. This has two benefits which involve ensuring the lump sum is paid directly to the estate rather than having to go through complicated probate. This can take months and is also an unnecessary expense. Furthermore, a trust ensures the beneficiaries receive the capital direct rather than having to go through the 'filter' of inheritance tax at 40%.
And where might you buy life insurance? Many buy life insurance as an incidental. They are typically arranging a mortgage from the bank or an estate agent and find themselves going home with a condiment of house insurance and life insurance. However, without seeking independent financial advice they may be wasting money as an independent financial adviser will simply plug into the system and find the cheapest organisation to provide the cover. For example, a Â£30 per month contribution with Legal and General for a 35 year old would provide Â£438,790 worth of cover for 25 years whereas Skandia would provide Â£297,030 for exactly the same premium. This is a difference of over Â£140,000. This is capital that should be going to your beneficiaries or alternatively you could simply opt for a cheaper premium. Friends provident, Pruprotect or Bupa all offer less than Â£400,000 for the same premium as above. (1)
It is not just banks and estate agents that could be providing this restricted service as many are attached to just one insurance company but others such as openwork, St James Place's tied salesmen etc are indeed restricted to offering just the products of their organisation.
Many insurance companies offer preferential commission terms to some advisers to just sell their products or a restricted range but ultimately that falls down on the customer who will inevitably get much less for their premium.
And finally, for those who have used an independent financial adviser, consider checking your life cover again to see if the premiums have reduced. You may well see a reduction in your premium for the same plan you have in place.
For a free fact sheet on life insurance or a free check of your own life cover call Peter on 0845 230 9876 or e-mail firstname.lastname@example.org
The value of shares and investments can go down as well as up.
(1) The Exchange
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'