As the old adage goes, we will insure everything in our lives such as cars, homes, pets etc., before even considering implementing a form of life cover. Perhaps this is down to the fact we feel a duty to protect our prized possessions, rather than ourselves and family. Following the last 18 months, many have reviewed this position and realised the need to protect themselves and their family.
In our previous article we focused on how best to ensure financial security for both Anita and Brad, along with their respected families, who established their own physiotherapy practice. The notion of relevant life cover/shareholder protection was introduced, considering ways in which potential liabilities could be covered by the business.
It is important that we consider that more risk has been taken by them personally with the setting up of the business, therefore it is essential to contemplate how Anita and Brad could protect their individual families financially for the future.
One core product of protection is personal life insurance. Three of the most common utilities of life cover are likely:
- to cover a mortgage liability in the event of death
- to provide a lump sum to the family in the event the main breadwinner was to die unexpectedly
- to cover a potential inheritance tax liability for beneficiaries upon the life assured’s death
There are many adaptations of life cover to consider, and these are usually flexible to meet the intending beneficiaries’ requirements. For instance, a whole of life policy is guaranteed to pay-out upon the life assured’s death (provided premiums and terms are met), whereas a more specific term assurance policy would be utilised to provide a certain level of cover for a set period of time.
Premium affordability is important and in certain instances can be managed accordingly. Unsurprisingly, term assurance policy premiums are often a cheaper alternative should there be a requirement to provide cover for the short term. However, once the term lapses, the policy would cease, and no disbursement would be received. Comparatively, while more costly, a whole of life plan would ensure a distribution of funds to their intended beneficiaries upon their deaths.
As Anita and Brad are aged 45, they could consider a 30-year term assurance policy covering £300,000 each, indicative premiums are likely to be in the region of £37 per month. Comparatively, whole of life cover from the age of 45 and on a guaranteed single-life basis would likely cost £346 per month – quite a substantial difference.
Another important consideration would be whether to provide an element of critical illness cover inclusive within the policy. When employed, the majority of workers will receive a critical illness policy through their employer, however when Brad and Anita convert to a self-employed basis this should be an important consideration. Indicative quotes suggest an additional monthly premium of £237 on the level term assurance of £300,000, to provide this important aspect of protection.
While on the topic of self-employment, both Brad and Anita should consider protecting their income for their respective families as they will no longer be entitled to statutory sick pay upon becoming self-employed.
An income protection plan is a long-term policy that will pay a regular monthly income if you become unable to work due to a specified long-term illness or incapacity. There is an initial waiting period before the benefit is payable on a claim, which is referred to as the ‘deferred period’.
Were they to look at implementing an income protection policy from the age of 45 to 65, assuming earnings of £40,000 per annum each with a deferred period of 12-weeks before the onset of income payments, premiums would be in the region of £51 per month.
Family Income Benefit (FIB)
As Brad and Anita, both have young families with liabilities to cover, they should consider a FIB plan to provide their loved ones with a degree of financial security in the event they were to die unexpectedly.
For instance, if you die within the term of the policy, the plan will pay a tax-free regular income, with payments made between the date of death of the life assured and the end of the policy term. Premiums tend to be cheaper because of this potentially restricted payment time.
Once more, were they to obtain twenty years of coverage from 45 to 65 and an income of £20,000 per annum for their loved ones, indicative premiums suggest a monthly premium of £20.90 per month each.
Unfortunately, as we probably all know by now, life does not always go to plan – who could have foreseen a global pandemic and the havoc throughout 2020, in claiming over three million deaths. Therefore, while often a dispiriting topic of conversation, mortality cannot be overlooked and the question ‘what would happen upon my death’ cannot be ignored.
Stay tuned as my colleague Anthony Rowe explores Anita and Brad’s options as they look towards retirement and the sale of Funny Bones Physiotherapy Ltd!