30 Oct Protection – safeguarding your legacy
Wren Sterling Independent Financial Adviser Sandra Corkhill explains why protection insurance is an essential aspect of financial planning. Here are her protection tips.
As a financial adviser, the toughest conversation to have with a client can be around protection. It broaches things we would all rather not think about, but it is very important, particularly when considering providing for family and dependents.
However, it can be easier to have this conversation when you start to analyse an individual’s lifetime aspirations and understand their emotional incentives for having them. They will no doubt want to lead a successful life, achieve financial independence (or close to it) and leave a legacy for their dependents – but psychologically they don’t always consider insurance to be as important as working hard or saving money.
There are some common objections to investigating life insurance that I will work through to illustrate the value of a comprehensive protection strategy.
“I’ve already got death in service cover through work”
Many employers include ‘death-in-service’ benefit, which entitles your nominated recipient(s) to a lump sum in the event of your death. Typically this is worth around four times’ your salary, but it’s worth checking your contract to see if you have this benefit and so you know exactly how much cover you have in place.
If you have limited debts, or few dependants, this may provide you with enough cover, but if you have a family, you should consider how long your death in service benefit would keep your family supported at their current monthly costs and would a change in circumstances negatively affect other income streams, like a partner’s salary?
Bear in mind, too, that if you change jobs, your new employer may not offer the benefit or the same level of cover, so you may prefer to arrange your own life policy so that you have continuous protection in place.
“It’s too expensive”
Perhaps the best way to think about this is why is it too expensive? There is usually a price point at which people feel comfortable paying a premium for the benefits of a policy and making this happen is part of an adviser’s job.
For a stay-at-home parent, for example, the cover could still prove invaluable, as childcare and other housekeeping costs would probably need to be paid for if you were no longer around and you might be already making provisions – an adviser can test the logic behind them. For example, if you’re paying into a junior ISA for your child in later life, if you were to die in the next 12 months, would that amount be greater than the payout on a life insurance policy and which option would best sustain their lifestyle? An adviser can help work these things out.Naturally there are many different types of cover and premiums will vary depending on your circumstances and your provider.
“I don’t need to worry about that at this stage”
We may think we’re too busy living our lives to think about death or becoming critically ill, but the reality is that it could happen to any one of us at almost any stage. Coupled with that is the rising cost of starting a policy later in life, so it can make sense to start earlier.
If clients decide they do want to buy a life insurance policy, there are usually a few more standard questions that I’ll work through here:
“How long will I need life cover for?”
First, you should think about any debts you have, such as your mortgage, credit card and any personal loans. These will need to be paid off when you die, so look at your current repayment terms.
For example, if you have a mortgage and it has 18 years left to run, you may want to only take out cover for this 18 year period, so you can be certain that you won’t leave a mortgage debt when you die and your family can remain in their home. Alternatively, you might want to take out cover for longer than this, so that you leave a lump sum when you die once your mortgage is paid off.
If you have young children, for example, it’s a good idea to take out cover that will last until they become financially independent.
“Should I take whole of life cover?”
If you don’t want to take out life insurance for a set term, but want it to last a lifetime, one option is to take out whole of life assurance.
This type of policy doesn’t have an end date, so you keep on paying premiums until you die at which point the policy will pay out (some policies require premiums to be paid only until you achieve an advanced age – perhaps 85).
As a payout is certain, this type of cover is typically more expensive than term insurance. The way this cover works is more complicated too, as some of your premiums will go into investment funds and some towards buying life cover. This means that the amount your dependants will receive when you die will vary depending on how the underlying investment has performed.
“What about Inheritance tax?”
The pay out on death from a life insurance policy is tax free however the proceeds will then form part of your estate for IHT purposes and if the estate is over the nil rate band (or combined nil rate band if married) then tax could become payable on any excess at the rate of 40%.