Securing Your Financial Future: Protecting Your Loved Ones
We would all be keen to protect our loved ones should the unthinkable happen – be that not being able to work due to injury or illness, suffering from a critical illness or even death. But how many of us put it off, thinking it will never happen to us? In our recent video series 'Securing Your Financial Future' we covered all different aspects of protecting your finances. If you managed to miss any episodes from this series, they are all available to catch up here.
Here we outline the main policies that should be considered to protect our loved ones against such events – and much of this can be done at relatively modest cost if dealt with early in life.
- Life assurance (term / Critical illness and whole of life)
- Relevant life
- Income protection
Term Life Assurance
This is the most basic form of life assurance and pays out a lump sum on death (or on the diagnosis of a terminal illness) within a set term. Its typically used to cover a mortgage debt or other loans. It is a very cheap form of life assurance – as an example the costs of providing say £250,000 of cover for a 20-year term would typically be:
- 25-year-old male £6.69 per month
- 30-year-old male £8.24 per month
- 35-year-old male £11.31 per month
- 40-year-old male £15.75 per month
There is no cash in value and the cover ceases at the end of the set term or if premiums cease.
We also use this type of product to cover any potential Inheritance Tax liability on gifts that require a 7-year survivorship period
Critical Illness Cover
This extends the basic term assurance cover to pay out on the diagnosis of a specified illness – the cost increases significantly compared to basic term assurance – looking at the above and taking a 40-year-old male. Critical illness cover increases the premium from £15 pm to just over £100 pm.
Whole Life Assurance
This cover is designed to last throughout life rather than a set term. There are a few options to consider including:
- Guaranteed premiums – determined at the outset and not subject to review. This is the safest option as it provides certainty over the premiums but is the most expensive.
- Investment linked - which needs underlying investments to perform at a certain rate of return to maintain the level of cover and are subject to regular reviews of premium
- Maximum cover basis, which can be cheaper and used for cover over a shorter time period. Again, its subject to regular reviews and premiums increase significantly to maintain the same level of cover as you get older
These policies are typically used to provide a lump sum on death for the payment of Inheritance tax – most commonly on a joint life second death basis for a husband and wife or civil partners when the tax needs to be paid on 2nd death.
It is important to ensure that the policy is written under trust so that:
- It pays out without probate needed AND
- the policy proceeds do not form part of the estate for Inheritance Tax purposes (and be subject to potentially a 40% tax rate!)
Relevant Life is a tax efficient way of providing cover for salaried business owners and employees. Company directors are able to make use of this type of policy to have the company pay the premiums for the directors’ life cover.
Cover levels can be significant – typically for a 40-59 year old - up to 20 x remuneration (and remuneration can include regular dividends)
The advantages of a relevant life policy include:-
- Premiums paid by the employer (company) are not treated as a benefit in kind on the director / employee
- The company gets tax relief on the premiums paid
- The benefits are written under trust and therefore outside of the Inheritance Tax net
- Any lump sum benefits paid are free of income tax
For the owner manager / company director, this type of policy should be considered for any life cover needed.
Such policies pay out if the policyholder is unable to work due to illness or injury. It usually pays for a fixed time (typically up to retirement age) but shorter terms are available (12 – 24 months) which are much cheaper options.
The policy will typically pay out a tax-free percentage of salary – usually 50 – 70% - after a deferral period of typically 13-26 weeks.
For employed individuals it can be tailored to fit in with any company sickness policy
It is particularly important for the self employed or contract workers whose income could cease completely if unable to work
As you can see from the above brief outline, there are many protection options available that should be tailored to your own individual circumstances.
The key is to make sure you take proper independent advice to ensure both the correct policy and the correct set up is achieved – as mentioned above it is imperative that any life policy is set up under the appropriate trust mechanism to avoid the proceeds forming part of the estate for IHT purposes – a common failing we find all too often in practice.
We will be bringing you a series of blogs detailing all the different ways of securing your financial future. However, we also have a video series available to catch up here.
If you would like any further information or wish to talk to one of our wealth management consultants on the forms of protection right for you, please get in touch with us today.