Life insurance – How to protect your family

Life Insurance – How To Protect Your Family

Today’s world is constantly changing, except for death and taxes which have both stood the test of time.  Neither of them a cheery topic, but both need to be acknowledged.  The prospect of either or both can be improved with a little preparation.  Anyone who is in a position of financial responsibility towards another person needs to think about how to protect dependants in the event of their own death.  For a lot of people this means a life insurance policy.  Here are the answers to some common questions.

What level of life insurance cover should I get?

In an ideal world you should have enough cover to protect your family’s needs for as long as necessary.  Life insurance policies are often taken out to protect children and a good rule of thumb is to consider what your child will need to keep them going until they are aged around 25.

At this point they should have finished education and be financially independent.  However, the greater the level of life insurance cover purchased, the more expensive it will be. One way to reduce this cost of the life insurance is to aim to provide enough cover for when your child reaches aged 18 rather than 25.  This will at least allow them to finish their core education in financial security.  If that is too much, look at what you can afford, having some level of cover is usually better than having none.  As a minimum it will at least assist with the immediate financial impact of your death and give your surviving family some breathing space to reorganize their lives.

Coping if a partner dies

Looking after young children can be difficult.  It may be great fun, but it is also hard work. If anything happens to the primary carer someone else will have to step in as child minder, cook, cleaner and taxi-driver.  Relatives and friends will often do what they can to help, but it is likely that they will only be able to give full time assistance on a short term basis.  Quality childcare can be very expensive. In this event you will need to look at life insurance cover for a home-making partner as well as a working one.

Should a policy be for the benefit of my partner, my children or both?

Your personal views and circumstances will determine the answer to this one.  Either way, it’s usually best to write your life insurance policy into trust.  In essence this will ring fence it from the rest of your estate and allow your family to access it relatively quickly.  Trusts come in various forms allowing you to create one set of conditions for your partner and one for your children.  An example would be allowing your partner full access to the funds immediately but release funds to your children bit by bit as they reach 18, 21 or 25 in order to prevent them spending too much too quickly.

Term assurance or an open-ended policy?

Neither is necessarily better. You need to think what best suits your personal circumstances.

Life insurance is to support dependants in the event of your death.  It is entirely different to building an inheritance for your children.

Term assurance policies can see  a child through to adulthood after which premiums can then be diverted to other purposes.  If your needs change you can always change to another policy.

Alternatively if you’re not sure about the length of cover you will need, for example if the intent of the policy is to support elderly parents in the event that you predecease them, then you may wish to consider an open-ended cover.