Why life insurance should be at the top of your to-do list
It’s a term we’re all familiar with, one that makes us purse our lips as we recount TV ads of nuclear families solving a puzzle, a soothing fatherly voiceover in our ear. Though it pains us to hear, we can all agree it’s sensible action to take, especially if you have a family – so why do over 8.5 million (1) people across the UK still not have life insurance?
Life insurance is undoubtedly one of those tasks that’s forever on your to-do list, occasionally earning a sparing glance as you cross off an item near the top. It rests alongside other forgotten tasks, namely your will and this week’s laundry.
Perhaps this is the reason that 8.5 million (1) people in the UK still don’t have life insurance - it’s one of those chores that we simply don’t want to do.
There are many obvious reasons why, but with 525,048 (2) deaths registered in England and Wales just last year, you can’t help but wonder whether this chore should take more of a priority.
Morbid as it is, death is a natural part of life, and it’s safe to assume that everyone wants their loved ones to be taken care of once they’ve passed on.
If you’re reading this and you’re young, healthy and single, you might be thinking, why should I get life insurance, what would be the benefit? You haven’t started a family yet and your parents likely own more than you do. In this instance, you’re probably right, there would be little benefit, other than the satisfaction of knowing that you’re prepared for the future, as some policies can offer a pay-out if you contract a critical illness later in life.
But for the rest of the population, the question still stands.
Is it that society doesn’t believe they need it, or that it would be too much of a chore to set up. Is it simply too expensive? Or do people simply not realise that it’s an essential, yet non-compulsory, duty to perform once you have dependants.
Some might say, that life insurance is just as important as getting your will in order. For in the sense that a will allocates your assets to your loved ones, life insurance ensures that your loved ones are provided with enough money to financially sustain them.
Imagine you don’t have life insurance and your take home pay is £30,000 a year. The worst happens, leaving your spouse and three children without you, and with £30,000 of unpaid expenses. Ask yourself the question, how will they care for themselves in the immediate and short-term future?
Even if you have a will, dedicating your savings to your family, the money could be subject to Inheritance Tax, immediately cutting into their safety net. Without a will, the situation can become even more dire, if you’re not married, your loved ones might not get anything at all.
Chartered Financial Planner David Jones states that it’s easy get tangled in the intricacies of life insurance, as even with a will, the life assurance money can still get caught in a tax net.
“While any life insurance is always better than none, it is vital to ensure it is set up correctly to avoid potential problems, such as unexpected tax bills.
“For example, if you arrange a life insurance policy which pays your partner a lump sum in the event of your death, that lump sum could be included in the valuation of your partner’s own assets when they die and be taxed at 40% as a result.
“If the lump sum were left to a suitable trust instead, your partner could still benefit from the money but the future tax charge could be avoided. However there may be some drawbacks to using a trust so advice should be taken.”
It’s a complicated affair, and there’s no simple check box that will solve the problem. This is why we recommend seeing a financial planner before setting up life insurance to ensure you get the best deal suitable for your situation.
Head of Legal Services, Mark Hopper, emphasises that it isn’t always as easy as an online form (although you can apply that way) as there are different forms of life insurance and add on policies, which will ultimately affect the outcome of your contract.
“There are two types of life insurance. Short-term and whole life cover. Short-term is cheaper but riskier, as it’s based on whether something will happen to you in an allotted time-period.
On the other hand, whole of life cover is more expensive but provides a confirmed pay-out to your family whenever you die.
“You can also add on policies which may pay out if certain things occur to you. For example, a critical illness policy would help you if you had a stroke and needed the proceeds to look after yourself.
“But where do you place this money? Do you give it to yourself and potentially sustain tax costs or in a trust where you may not personally get access to the money. Once you get into it, life insurance is quite complicated.”
That’s a fact that is unlikely to change, so whilst you always have the option of setting up life insurance online, we always advocate seeing a specialist first.
For those that are still unsure, lets break it down.
Why should I get life insurance?
Life insurance ensures that your loved ones will be taken care of if anything were to happen to you. It works as a financial safety net and if set up correctly, won’t be taxed as part of your estate. It can also support you financially if you are diagnosed with a serious illness.
What type of life insurance should I get?
This will vary depending on your circumstances, so we recommend taking advice before setting anything up. As mentioned above, a policy can provide cover for a fixed period of time, or the rest of your life, but there are many other variables to consider, such as whether the cover needs to increase each year with inflation and whether a policy producing an income, rather than a lump sum, is more appropriate.
Should I use a trust?
A trust may be appropriate, for the purposes of mitigating Inheritance Tax, but if you take out a critical illness policy, which will release a cash sum to you if you become seriously ill, you may not have access to the money if the policy is held in certain types of trust. Special trusts are available which can solve this issue, which is why it’s important to seek advice to help you make the best decision depending on your situation.
How much should I be paying for life insurance?
Life insurance prices depend on each individual as it takes into account many details of your life and medical history. However, for someone healthy and relatively young, it generally isn’t expensive and comes out of your bank account like any regular bill each month.
Why should I speak to a specialist?
Online forms are quick, but do not give you the depth of information that financial planners can provide you with. To ensure you get the best deal for you, planners will use their industry experience to understand the intricacies of life insurance and tailor a plan that suits you.