By Martin Lewis
Parents often ask me about saving for their children and I always ask them if they have life insurance. We all want to see our kids grow up and flourish, yet one in 29 children – a typical class size – lose a parent early in life. And on top of the horrendous destructive grief, as prosaic as it sounds, there are often serious financial considerations too.
There are 3 types of life insurance
Life insurance is an insurance policy you take out that’s designed to pay out a lump sum when you die. There are three main types of policies (other than investment type life assurance plans):
Level term life insurance – this pays out a set amount if you die during a set time.
Mortgage decreasing-term life insurance – this aims to clear your mortgage. So as your mortgage debt drops with time, so does the amount it’d pay out.
Whole of life insurance – this policy is mainly about mitigating inheritance tax costs.
The cheapest easy to protect your family is level term life insurance
With level term insurance you pay a monthly premium and it pays out a set amount if you die within a set period of time. The more cover you get and the longer the term you want, the more you’ll pay.
And as there’s usually little dispute over whether someone is dead or not – and the pay-out is fixed, then providing the company is reputable, it’s usually just a case of the cheaper the better.
A rule of thumb is cover 10 times the main breadwinners income
The aim is to have enough cash to cover the lack of income if you’re gone. Aim for an amount that repays any outstanding debt and provides for outgoings your dependants would have.
In a couple, even if the one who died wasn’t the main earner, there can be serious knock on effects. For example, perhaps the higher earner would need to give up some work or pay for childcare.
You may have ‘death in service’ cover from your employer which can reduce the amount you need. Shortening the term cuts the cost, although generally you’d want cover that lasts until children have finished full-time education.
Those who’ve had serious medical pre-existing conditions, and smokers, pay more for cover. If you already have life insurance and have been nicotine free (including e-cigarettes and patches), it could be worth seeing if a new policy would be cheaper.
Slash £1,000s off the cost of level term insurance
Never think of life insurance as a monthly cost, you may be paying it for 20 years, so every £1 a month cheaper is a saving of £240. For full help finding the cheapest policy see www.mse.me/lifeinsurance, but in brief…
Beware of going direct to an insurer; it’s a competitive market, you need to ensure you’re finding the cheapest.
Even comparison sites can be over-expensive as they usually take a huge whack of commission from the insurer.
If you don’t need advice, use a discount broker. Here you pay a fee of £25ish, but they rebate all the commission into your policy so it can be £1,000s cheaper.
If you do need advice (and getting it right is important) use an advisory broker or Independent Financial Advisor. While they take the commission, at least they’re doing something for it.
Write it in trust to protect dependents from tax
A life insurance policy is yours, so if you die the pay-out forms part of your estate and would be liable for inheritance tax. However if you write it ‘in trust’ to your dependents, it is paid directly to them so inheritance tax isn’t due.
Most insurance policies include the option (and papers) for writing in trust directly at no extra charge. If you know what you are doing, you can write the policy in trust yourself. If not, get advice.
Martin Lewis is the Founder and Chair of MoneySavingExpert.com. To join the 12 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip.