Understanding Life Insurance and investing in Life’s unexpected turns PART 2
When life STILL gives you the sourest lemons…
“I like to think that one day you’ll be an old man like me talkin’ a young man’s ear off explaining to him how you took the sourest lemon that life has to offer and turned it into something resembling lemonade…” - Dr K, This is Us
This is Part 2 of a 2 part series on life insurance. Please read Part 1 here
Family income benefit
Unlike Term Assurance where your family will receive a lump sum of money upon your death, with the family income benefit insurance, your family will earn a fixed monthly income for the rest of the ‘term time’ (i.e. the insurance cover period). Like the Term Assurance, you have to pay monthly premiums (charges) which is dependent on the income you would like your family to have and the length of your term.
OK so let’s clarify with an example. Say Dad (currently 37 years old) wants to get the family income benefit insurance cover for himself because, he and Mom (32 years old) don’t have a mortgage or massive debts what would need to be cleared if he died and he would prefer his family have a consistent flow of money on a monthly basis.
He decides to pick a term of 38 years, as his wife’s state and private pensions would have both kicked in at the new retirement age of 70 years ( which takes effect from 2028).
Based on their current lifestyle they estimate a 30% increase to accommodate costs of living increases and inflation (this is just my estimate, and you should do your own calculations) as the years pass and their children grow. So Dad gets insurance that would pay out £5000 per month for the next 38 years.
Getting Paid :(
If Dad died immediately after the policy was taken out, the insurance provider (insurer) would pay £5000 a month for 38 years. If Dad died 10 years after the policy was taken out ( assuming you are still paying your premium faithfully), the insurer would pay £5000 a month for the next 28 years.
Yippie you live :)
If you live past 38 years, when you do eventually die, there will be no monthly payments to your family.
Suitability Checklist: Is Family Income Benefit right for you?
Here is my checklist to find out if family income benefit would suit your needs. Can you answer YES to all these questions? If you can, you may have found a good fit for your family.
Do you have financial dependants?
Do you want the money to be paid in instalments rather than as a lump sum?
Are you more comfortable with short term / monthly budgeting?
Are you happy to handle refinancing your home at the right time to get the best mortgage deals?
You OK with your family receiving a reduced payout if you die towards the end of the term time.
Joint Family Income Benefit Insurance ...when 2 become 1
Just like the Term Assurance, you can get the Family Income Benefit Insurance solo or as a couple (however, you don’t have to be married, you can even be business partners). My husband and I have a joint life insurance policy (we have common term assurance so one of us would get a lump sum amount if the other passed away).
It is important to know that even though two lives are covered by the policy, there will only ever be one payout after the first partner dies.
On a positive note, it is cheaper than buying two individual insurance policies because there will only ever be one payout.
However, I must highlight the downsides to this “insurance marriage”.
Like I said before there will only be ONE payout after the first partner dies. If the most “sourest-est” lemons do get served up and both policyholders should die at the same time, there will still be ONLY ONE payout paid to the beneficiaries ( loved ones you are trying to protect financially).
It’s a sad fact that 50% of real marriages end in divorce and the courts can split up your assets, so each people gets a fair-ish share.
NOT so with Joint Family Income Benefit Insurance.
It can’t be split. You can, however, cancel the insurance and look for a new policy.
Should your relationship end (personal or business) you can not split the cover into two individual policies. It is important to remember that one thing that affects your monthly premiums is your age. So after the first partner passes, the surviving partner will have to arrange new life insurance which will probably be more costly if you are much older.
Whole of Life Insurance
This is the type of insurance covers you for the whole of your life literally till you die and then pays out a lump sum to your family or beneficiaries. This type of insurance pays out every time (because everyone eventually dies) and so the monthly premiums are generally more expensive plus you have to pay every month till your die are turn 90 (whichever happens first).
There are 2 types of Whole-of-life Insurance
Balanced/ standard cover:
With this type of cover, your monthly charge is fixed till you die or turn 90 and an agreed fixed lump sum amount to be paid upon death.
Maximum cover:
Here, your monthly premiums are invested on your behalf in an investment fund with the hope your monthly contributions will grow, and the returns will cover the cost of the payout.
However, all investments carry a degree of risk and your money may go up or down. If they should perform poorly, the insurer may change the terms of your policy. Your monthly premiums could increase, or the size of the payout your loved ones will receive could reduce.
This possible increase in your monthly charges could substantially increase the overall cost of your policy (which might have been affordable to start off with). So watch out for this.
Suitability Checklist: Is Whole-of-life insurance (in trust) for you?
Here is my checklist to find out if whole-of-life could suit your needs. Can you answer YES to all these questions? If you can, you may have found a good fit for your family.
Do you have financial dependants?
Do you want to help cover your funeral costs?
Are you determined to leave your family with a lump sum amount of money no matter how long you live?
Are you worried about the inheritance tax bill your family will have to pay?
Lemonade preservation, i.e. Protecting your payout from tax.
Death sucks! I know. But what’s worse is getting the chair pulled from under you as you are about to seat you grieving self down. Close your eyes and imagine, you are dying of thirst, and you got sold the sourest lemons ever.
You walk 1 mile under the hot sun to the nearest shop to get a lemonade maker and walk back home. With the little strength left you to make your drink, you take a sip .. it doesn’t taste right, you make some slight tweaks and add your secret ingredient - lets’ say it’s your awesomeness... And take another sip... It’s now perfect. You pour it into a large glass and leave in the fridge for a few minutes for it to chill while you go get the book you have been trying to finish reading all year.
You pick it up and walk back downstairs, to the garden and put it on your deck chair. You head back into the house, back into the kitchen, you open the fridge door and pick up your lemonade glass... But something is terribly wrong. Someone has drunk almost half of your lemonade without your permission, you scream “WHO DRANK MY DRIN..” before you finish your sentence you turn round and see the culprit in your kitchen. And who is it?? None other than the TAXMAN!!
OK, so that was a long roundabout way to say that if your estate is valued above £325,000, the excess will incur 40% inheritance tax. This will include your life insurance payout meaning your family/beneficiaries will loss 40% of their payout to the tax man. Seems like a poor deal after paying a high premium every month for many many years.
Tax Avoidance
However, there is a legal way to avoid the unnecessary distress this can cause. This is by having your life insurance policy written ‘in trust’.
In Trust
So what’s a trust? It is a legal arrangement where you hand over the ownership of your assets, and it is overseen by the trustees you appoint. This means these assets are no longer part of your estate as you have given up full ownership of them.
The trustees will ensure that the assets contained within the trust go to the named beneficiaries.
So if your estate is valued above £325,000, and your life insurance policy is in a trust, it will be handled separately from your estate, and can not be touched by the taxman.
How to set up a trust for your insurance
This is usually free and straightforward. When you are setting up your life insurance, ask your insurer if they offer “writing a life insurance policy in trust” as a free add on service. Most insurers do this.
If you have already taken out your life insurance policy and now decide you want to put it into a trust, you can still do this, though there might be a charge.
Not your typical Free Prize, i.e. 3 Insurance Add-ons
Critical health insurance
This type of insurance covers you and your family for a lump sum payment if you are diagnosed with one of the critical illnesses stated in your policy.
These include but are not limited to:
Cancer at a certain severity
Heart attack
Stroke
Organ failure
Multiple Sclerosis
Alzheimer’s disease
Parkinson’s disease
The specific diseases covered by critical illness policies vary between providers. However, certain diseases or conditions are included as standard by most insurers. It’s vital that you read policy documents thoroughly so that you understand what is and what isn’t covered.
Income replacement insurance
This type of insurance will replace your income if you can’t work because of an illness or if you become disabled until you can resume work.
Mortgage protection
This type of insurance covers your mortgage payments if you cannot work due to an accident illness or if you lose your job.
Shopping for your lemonade maker, i.e. Finding the right insurance brokers
When discussing your insurance needs with an independent financial adviser or broker, it is essential for you to clarify to her/him what you are trying to do and who you are trying to protect.
Your adviser should focus on understanding your values and goals and not what you can afford to pay for the premium.
Your adviser should show some interest in the other area of your financial plan including your debt.
On your part you can:
1.Seek out an independent broker that is not explicitly linked to one insurance provider
2. Make sure you are not pressured into an expensive policy that isn't in your interest
3. Make sure you have multiple offers from different providers to choose from
4. Ask your friends for recommendations