Money Basics - Protection
Money basics is a series of short articles where we will explore several themes that confuse and bewilder and try to break down all the legalistic jargon into plain English.
In the first article we covered pensions, covering ISA accounts in the second and bonds/endowments in the last. So we’ve covered how you can wrap up your investments – what about protection?
We take out life insurance for a variety of reasons. We might want to cover ourselves against the possibility of critical illnesses, we might want our mortgages paid off if our spouse dies.
Some businesses supply death in service as an employee benefit so their employees need less life insurance, thereby saving them money.
Some businesses insure against the death of a major shareholder so the business has the finance to buy out the estate if necessary. Some businesses also insure against the death of a key employee so they have the money to recruit and train a replacement as well as other costs involved.
There are other insurances called income protection, but we’ll cover that next week as income protection is quite complicated.
Write it in trust
For people (not businesses): Almost always, writing your life insurance in trust is the sensible thing to do. By having the policy in some form of trust it avoids any potential for inheritance tax. Trusts for life insurance simply save time and money.
You’ve got to be careful here as you don’t want to get the wrong trust. For instance if your life insurance contains critical illness then you need a split benefit trust so you can benefit from a critical illness claim and so others can benefit from a death claim.
Generally speaking I advise level term cover; meaning that if you are insured for £200K at the start, you will be insured for £200K at the end.
There are ‘mortgage protection’ policies and ‘family income benefits’ however the cover here reduces over time. If you die in the last year – which is when it is most likely – you end up with less cover than the premiums you paid. This doesn’t seem like good value.
They are only slightly cheaper than a level term plan.
Critical Illness tips
When buying Critical Illness cover, ALWAYS check for something called Total and Permanent Disability – this is key. It essentially can mean that if you are too disabled to work then the cover will pay out and is a cover-all really, however; you still need to check the terms around this.
If you don’t have TPD or PTD then you are relying on suffering one of the listed conditions; if you don’t get something on the list you don’t get a payout.
How much cover do I need?
You could approach this from a budget perspective. Obviously the goal is to live and retire, which means investing for retirement – if you spend all your money on life cover you will not save for retirement.
Look at how much you can reasonably afford and go from there. Most people spend £40-150 a month on life cover.
For businesses the life insurance should form part of the business risk mitigation plan, and should come from the budget for that.
Our in house Independent Financial Advisors can help you with all aspects of financial planning including pensions, investments and inheritance tax planning. If you need any legal advice, please contact the Chattertons’ Wealth Management team at your nearest office.