What type of life insurance or cover do I need?

Every month, we put one of your questions to our experts. In this article, Jenny Whitehouse, a financial planner from our Leeds office, and Ruth Slavin, an adviser based in our Manchester office, give their opinions.

I’m 38 years old and recently became a mother for the first time. As I’m the main breadwinner in our family, I’m conscious that I don’t have any sort of life cover in place at the moment and this needs to change. I want to make sure that I’ve got the right type of insurance plan for me and my family, as there are a lot of options out there and I don’t want to pick the wrong one. What do I need to be thinking about?

Jenny Whitehouse, Financial Planner

You’re absolutely right. There are so many different options available and it can be tricky to decide which one is right for you and your family. Here, I’ll outline the main points you need to think about before choosing your protection plan.

How much cover do you need?

The first thing you need to consider is how much you need the policy to pay out. If you’re just looking to cover the cost of the mortgage, then it’s pretty easy to see how much you need. If you want to cover any other expenses following your death, you’ll need to sit down and work out how much you’ll need in order to pay for them.

Who do you need protection for?

If you live on your own with your child, then you will probably just need a policy which covers you. On the other hand, if you live with a partner, you will need cover for the both of you. It’s evident that you understand the need for insuring your own life but you also need to think about your partner. Even though you’re the main breadwinner, if your partner is working, I would assume that their income is included in the household expenditure. If they were to die, you would need to think about how you would cover this. Alternatively, if they are not working and providing full-time child care, you need to consider how you would pay for child care in the event of their death so that you could continue to work.

You might want to think about taking out a joint policy or you might be better off sticking with your own depending on the level of cover required and what the cover is for.

What about if you’re off work?

You need to consider how you would cover your income requirements if you’re off work for a long period of time due to sickness, so I would suggest that you think about taking out an income protection policy as well as life cover. When looking at an income protection policy, you need look at how much cover you need and also how long the deferral period is (i.e. how long before the policy starts paying out) if you’re off sick.

I would also urge you to consider a critical illness policy. In the event of such an illness, you may have to give up your job. While life cover will pay out a sum to your named beneficiaries in the event of your death, if you are diagnosed with a critical illness and you have the relevant insurance, you will receive a tax-free lump. This could help to cover any loss of income or the cost of any modifications to your home if required.

What’s your budget?

You need to think about how much you can afford. As you are aware, there’s a huge range of different policies available to you and some will be cheaper than others.

If you’re looking at an income protection plan, it’s worth noting that typically, the shorter the deferral period, the more expensive the plan will be. With this in mind, we would always encourage people to have an emergency cash fund in place. If you became ill but had say six months’ worth of income saved up, you could use that initially before accessing the policy, which could help decease the monthly cost.

Are you over insured?

Before taking out any sort of cover, you should check with your employer if you have any insurance through your workplace. Many employers do offer various types of cover as an employee benefit and unfortunately, I see a lot of people who have taken out additional insurance plans when they didn’t need to as they already had cover in place.

Ruth Slavin, Adviser

Firstly, congratulations on your new arrival. I hope everyone is settling in well.

A lot of people come to us questioning ‘what if’ after a life-changing event, such as the birth of a child. As you say, there are lots of solutions available, but there are also lots of issues to consider.

Where to start

In the event of their death, most people want to make sure that their family is provided with a lump sum to pay off any outstanding mortgage debts so that they would not have to make any difficult decisions around selling the family home at what is already a horrific time.

It’s important to note that mortgage payments are not the only household expenses. Bills, council tax and general maintenance costs soon add up so you need to consider if the people you leave behind would still be able to afford this without your income. You may want to consider taking out a policy that would continue to pay your beneficiaries an income, but you need to think carefully about how much this income should be and how long you want it to be paid out for.

Thinking about more than just your mortgage

You need to think about what you see in your future, now. If you were to live a long and healthy life, what are your plans and ambitions for you and your family? Next, you should consider if you were to die earlier than you may have expected, do you still want your family to do those things and do you want a cash lump sum to pay for them? For example:

• Do you want to provide an amount for your child to go to private school and continue their education on to university?
• Do you have dreams of buying a second home in your favourite holiday location and do you still want your family to do this even if you’re not here?

What about your partner?

As well as insuring yourself, if you have a partner, you should also consider taking out some sort of cover for them too. You need to question what would happen if they were to become ill or die. What sort of impact would this have on childcare and your household’s finances? Their death or incapacity could have a massive bearing on your ability to go out and earn the money that you do. Making sure that they are protected is just as important as covering you as the main breadwinner.

Making sure your family are never financially vulnerable

As you’re conscious of choosing the right insurance plan for you and your family, it’s clear that you’re worried about leaving your family in a financially vulnerable position. While this could happen without protection on your death, it’s important to remember that it could potentially occur throughout your life too. Life insurance is one of the most popular types of financial protection but it only pays out on death. There’s actually a much bigger chance of that vulnerability happening if say you couldn’t work for a prolonged period or if you became seriously ill, so it’s worth considering how you would protect your income if this were to happen. There are different types of income protection and critical illness plans that allow for such events.

Putting the policy into trust

Ensuring that the right amount of money is passed on to the right people on your death is just as important as taking out financial protection. Putting your policy into trust is a great way to do this as you can make sure that the proceeds are paid out to the beneficiaries in the correct form and at an appropriate time.

There are a number of positive aspects of putting the policy into trust for the beneficiaries themselves too. On your death, the proceeds of the policy are paid outside of your estate and therefore are not be liable to Inheritance Tax. Also, there is no need to wait for probate to be issued following your death, which means that the proceeds can be paid quickly and directly to your beneficiaries.

With a number of different types of trusts available, I would suggest seeking professional advice before deciding which one is best suited to your needs.

Advice in relation to trusts and inheritance tax planning is not regulated by the Financial Conduct Authority, however, the products used in relation to trusts and to mitigate tax may be regulated.

Speak to Tilney

You can make the decisions around your life cover yourself but it involves a fair amount of research and time on your part. Tilney’s financial planners can help you make important decisions around financial protection and life-changing events, so it doesn’t fall entirely on your shoulders. If you would like to speak to a local financial planner about your situation, we offer free initial consultations over the phone. Although we can’t give you advice during this consultation, we can give you some general information and let you know if we think you would benefit from personalised financial advice and explain the costs. You can book a free consultation online or call us on 020 7189 2400.

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