Family Protection in the event of death.
A death in the family can be an extremely traumatic and painful time, particularly for remaining family and loved-ones.The financial pressures can be heightened when children are remaining. The loss of this person and the income they bring into the household can severely affect the future of remaining family.
For this reason family protection in the form of life insurance is essential to ensure their future is protected. The remaining family has the continued financial resources to maintain their standard of living and continue life the best they can.
Two of the ways in which family protection life insurance can be arranged are:- Family Income benefit or Level Term Assurance - both are designed to provide sufficient tax-free income, referred to as the sum assured, to protect a family's financial stability for a set period of time, which is known as the policies term.
A suitable level of cover can be advised based on the future expenses that would need to be maintained, or by a multiple of life assured's salary. An adequate term can be advised based on years when a financial dependence exists. For example, this could be up until a son or daughter reaches an age of financial independence such as 21.
The first form of family protection, Family Income Benefit, is designed to pay out a regular benefit over a set period of time in the event of the assured's death. For example, Mr. Jones is insured with a family income benefit of £10,000 per annum over ten years but dies after 2 years of the policy being in force. The policy will continue to payout £10,000 a year for a further 8 years to his remaining family.
Certain insurance companies offer the option of taking the remaining benefit as a lump-sum payout. For example, in Mr. Jones' case his family would be entitled to £80,000. Other options available for Family Income Benefit include index linking. This links the policy to the Retail Price Index ensuring any increases in the cost of living are reflected in the sum assured. The benefits of this being that the sum assured being paid out in 20 years time will still hold as much value as it would do today.
The second type of family protection is Level Term Assurance, which is structured to pay out a fixed sum assurance if a death happens at any time during the policy. For example Mrs. Smith has a Level Term Assurance of £250,000 over 21 years and dies after 19 years of the policy being in force. The insurance company would pay £250,000 to Mrs. Smith's remaining family.
As with the Family Income Benefit, it is also possible to inflation-proof the Level Term Assurance by linking it to the Retail-Price Index. Another option which may be of particular benefit with the Level Term Assurance is writing the policy into Trust. This option effectively assigns the life insurance policy outside of the assured estate to become exempt from inheritance tax.
Upon death, all of a person's assets are calculated as their 'estate'. This can include everything from cars and personal belongings to property and life insurance policies. Any estate can be passed between husbands and wives on one of their deaths without being subject to any tax, however any other transfers on death are subject to the current Inheritance Tax threshold of anything over £325,000.
For example, unmarried Miss Wilson dies and leaves an estate to the value of £425,000 including mainly a house and a large insurance policy with a sum assured of £100,000 to her children. The life insurance policy is not written in Trust. This estate would be £100,000 over the inheritance tax threshold therefore meaning this amount would be liable to 40% tax - £40,000. If the policy had been in Trust this £100,000 sum assured would have bypassed the deceased estate and gone directly to the intended beneficiaries effectively saving that £40,000.
Protecting Your Family
No-one likes to think about dying, but many people with families realise that it's a sensible precaution to ensure the family has enough money to live on, should the main income-earner or main carer die unexpectedly. There are different types of family protection on offer, depending on your circumstances and wishes:
Term Assurance
This is a policy that runs for a fixed period of years. It's useful if you just want life insurance during especially important times, such as when children are growing up.
Whole of Life
This is a policy which is more wide-ranging than a fixed term policy, covering the whole of the insured person's life and with a sum guaranteed to be paid out on death.
Endowment Policy
This operates like a regular savings policy, in which you pay regular amounts over a fixed period. It pays out a lump sum if you die within the policy period - but it also pays out if you're still alive after the final premium has been paid or if a certain period of time has passed after the fixed period has elapsed.
Critical Illness Cover
An agreed sum is paid out on death or on the diagnosis of medical conditions specified in the policy. These are usually serious or life-threatening conditions such as heart disease and cancer. Critical Illness Cover is often an optional extra which can be added to other life insurance policies - though it can be taken out as an individual policy.
Click here to get a quote for family protection or call 0800 389 2193 to speak to an adviser.
