A guide to protecting your family after you’re gone

Mums Tips

Parenting Skills

Published on Thursday, 07 February 2019 16:23

Last Updated on 28 July 2020

Monica Costa

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Considering what it would mean for your family if you were no longer around is never a pleasant thought, but unfortunately nothing in life is certain.

However, taking steps to secure the future financial stability of your family, even if the worst were to happen, can at least offer you peace of mind. 

What’s more, you can secure cover protection for as little as 20p-a-day. (Keep reading)…

The implications

Unfortunately, there are a number of possible financial implications if you were no longer around:

• Could your family continue to make monthly mortgage repayments?
• How would they pay for additional childcare? (Average full-time cost £233.36 a week)
• Would they survive without your regular income?
• Would they be required to downsize or relocate in order to meet daily living costs?
• Do they have the funds for your funeral? (Average cost £4,271)

 

It’s scary to think of the struggles your family may face if you were no longer there to support them, both emotionally and financially.

Even the loss of a stay-at-home mum is said to equate to a household loss of £80,000 per year– factoring in additional childcare and other associated costs.

Fortunately, there are a number of cost-effective options available to ensure your family is protected, whatever the future may hold.

 

Life insurance to protect your family

Perhaps the most common method for securing the financial future of your loved ones is life insurance – which offers a lump sum pay out should you pass away during the policy term.

There are various policy types associated with family life insurance, the most common being level term and decreasing term life insurance.

Level term life insurance provides a fixed sum assured, which holds it’s value throughout the term of the policy.

If you pass away at any point before the term expires, a lump sum pay out for this amount will be made to your beneficiaries to use as they wish.

Because the pay out sum remains fixed (or level) throughout the policy, it is well suited to cover an interest-only mortgage, where the capital borrowed does not decrease.

Decreasing term life insurance is very similar, however the sum assured decreases throughout the term of the policy.

This means, that the later you pass away in the policy term, the smaller the sum received by your loved ones.

As a result of its decreasing value, this type of policy is most commonly used to protect the family home, allowing the remaining balance of a repayment mortgage to be covered.

Both types of life insurance will provide your loved ones with a lump sum pay out (albeit of differing values) to use as they deem fit.

When choosing which type of family life insurance to choose, you should consider which aspects of your families lives you are looking to protect.

Decreasing term life insurance may be suitable if the mortgage alone is your biggest concern, however for other costs such as your funeral, daily living costs and outstanding debts, level term insurance may be more beneficial.

As a result of the pay out sum reducing over time, decreasing term cover is more affordable than level term.

 

Writing your policy in trust, (avoid 40% inheritance tax)

Unfortunately, inheritance laws in the UK state that any excess over £325,000, with regards to the value of your estate, is charged at 40%.

Your life insurance forms part of your estate and as a result contributes towards this IHT threshold.

However, by writing your life insurance policy in trust you can detach its value from your legal estate.

This means your loved ones will receive 100% of the sum assured and the amount at which they exceed the £325,000 will be reduced if not diminished – reducing the amount of tax paid.

Writing your policy in trust also means the pay out sum will bypass probate, speeding up the process of your family receiving the proceeds.

Finally, by signing the rights of your life insurance over to someone you trust (a trustee), you have more control over who receives your life insurance pay out as it provides you the opportunity to declare how you would like the pay out to be distributed.

All major insurers can provide trust forms free of charge. You can even write some existing policies into trust.

 

Family income benefit (or FIB)

Along with your mortgage, the biggest regular outgoing for most families would most likely be day-to-day family living costs.

Whether due to a loss of your income or the need for additional childcare now that you are no longer around, meeting daily living costs is likely to be more difficult moving forwards.

Family income benefit provides your family with a tax-free monthly income to be used towards day-to-day expenses.

When arranging this type of cover, you specify the amount you require each month and how long you require payments to be made (the term).

For example, if you chose payments of £1,500 over a 25-year term and then die 10 years into the policy, your family would receive £1,500 each month for the remaining 15 years.

This eliminates the need for budgeting which comes from receiving a one-off lump sum and can be set to reflect the period which you believe your family (predominately children) would be financially dependent upon you.

It also removes the need to invest and/or manage a single large lump sum, which can be very stressful, an enormous responsibility and incur professional fees.

Funeral plan

Funerals are a subject no one likes to address, but unfortunately the costs rising 122% since 2004, it is a subject which cannot be ignored.

The average cost of a funeral in London is now £5,880; a sum which would be considered significant to many families within the area.

This cost is the responsibility of your family, meaning that without readily available funds they may need to result in taking out loans, selling possessions or borrowing money from family or friends.

Arranging a prepaid funeral plan allows you to cover the cost of your funeral in advance, so that when the day comes, your family are not left footing the bill.

A funeral plan also allows you to lock in today’s rate and therefore avoid any further increases in price.

 

Multiple forms of cover

As discussed in this post, there are various ways you can protect your family if the worst were to happen to you, but how do you decide which option to choose?

Perhaps you don’t have to?

Each form of cover protects different aspects of our live. Therefore, it could actually be beneficial having multiple forms of protection in place simultaneously. (Subject to budget).

For example, decreasing term life insurance to cover the remaining balance of your mortgage, family income benefit to support day-to-day living costs and a funeral plan to cover the expense of your funeral.

When deciding the best option for you, it is important to consider what aspects would be most greatly affected by your passing and arrange protection accordingly.

 

How to secure the best deal

 

You may be surprised to learn that policy premiums can vary significantly between different insurers.

In order to secure the right policy, at the very best price, it is important to compare multiple quotes.

You can do this either by using an FCA registered broker or a credible comparison website.

Depending on your sum assured, age and health, you can secure cover from just 20-a-day.

If you do not have life insurance in place, why not seize the day and secure the future of your loved ones.

Then get on with the fun things in life, like enjoying your family and friends.