The value of life insurance cannot be overstated. Life insurance not only offers protection for your family and home in the event of your death, but can also be used as an invaluable tool in your financial planning.
Some people may think of life insurance as just another expense. The question you need to consider is would someone in your life suffer an economic hardship if you were to die?
If you’re married and have young children at home who depend on your income, you have a clear need for life insurance. If you were to die, the loss of your income could cause an immediate financial hardship. Even if one spouse is a stay at home parent and doesn’t bring in a formal paycheck, his or her death means that the surviving spouse will have additional expenses such as child care, cooking, and housekeeping – all necessary services for running a household.
Just because you don’t have children or aren’t married, doesn’t necessarily mean that you don’t need life insurance. If your spouse or significant other depends on your income to keep the bills paid and to run the household together as a joint venture, then having the financial safety net of a life insurance policy is vital.
The loss of a loved one is an emotional and traumatic experience for any family. But not having enough money to meet immediate and ongoing living expenses, can make a very difficult situation even worse. Not only are the people you love grieving your loss, but they’ll now have added financial stresses to cope with. Depending on their current financial resources and ability to get back on their feet both emotionally and financially, your loved ones could be forced to move to a less expensive home or community, forego education and career plans, and cut back on their quality of life. They may be even forced to take out loans to pay for your funeral and burial costs, as well as any outstanding medical or tax bills.
If you’re wondering why life insurance is important, stop to consider the potentially devastating consequences of not having coverage to financially protect the people that you love.
Critical Illness and Total Permanent Disability cover are perhaps even more important. What would be the impact of being out of work due to illness? And what would you do if a car accident rendered you unable to physically do your job? Whilst no one likes to think it will happen to them, statistically there is a fairly high chance something serious will happen to us all at some point.
What different types of life insurance policies are there and what are they used for?
There are two main types of life insurance policies, the first is called ‘Term’ insurance and the second is called ‘Whole of life’.
Term insurance covers you for a fixed term, for example 20years, after which point the policy expires. Whole of life typically covers you until death. It is possible to convert a term policy to a whole of life policy.
Term insurance is generally much cheaper, however, when the term is finished your cover stops and any premiums you paid over the term period are an irretrievable expense. A whole of life policy invests a portion of your premiums and you can accumulate accessible savings.
Term policies are typically used to insure debt such as a mortgage or to cover a shortfall in your existing savings. A decreasing term policy is perfect for covering mortgage debt as it is cheap and can be set up so the value of the cover decreases in line with your mortgage debt.
A whole of life policy can be a great tax planning tool. Having a policy that will pay out enough to cover your inheritance tax bill can save your family a huge amount of stress. Many families will have to sell property to foot this bill, so having an insurance policy can prevent that from being necessary. It is also extremely easy to put an insurance policy into trust, most providers have this as an option when you take out the policy. This means the pay out will fall outside your estate and not be liable for inheritance tax.
What is critical illness cover?
Critical illness cover is an insurance product in which the insurer is contracted to typically make a lump sum cash payment if the policyholder is diagnosed with one of the specific illnesses on a predetermined list as part of an insurance policy. The policy may also be structured to pay out regular income and the payout may also be on the policyholder undergoing a surgical procedure, for example, having a heart bypass operation.
The policy may require the policyholder to survive a minimum number of days from when the illness was first diagnosed. The survival period used varies from company to company as does the list of illnesses covered for. Mostly these policies would be used to cover a potential loss of earnings from being off work for a prolonged period of time.
What is TPD?
Total permanent disability would cover you in the event that you became unable to perform your employment function due to a disability. Most commonly this would be due to physical damage sustained in an accident.
What policy and how much cover do I need?
Each person has different requirements and many factors should be considered including age, current liabilities, children and wealth.
A life insurance policy should cover all debts and future foreseeable expenses for your family.
Critical illness as a rule of thumb should be covered for an amount equalling a minimum of 6 months living expenses. Typically after 6 months you will either be back at work in some capacity or your life insurance will be paying out.
If you want to use a life insurance policy as a tax planning tool, you will first need to calculate your potential inheritance tax bill. Our easy to use inheritance tax calculator can help you.