What are you worth?
In economic terms you are a cash machine that prints money. The National average income
, in the UK is £487* per week every week, over a lifetime! If you had a money making machine that produced £487 per week indexed what would you insure it for - the scrap value of the machine or its capacity to print money?
Making the most of your money – Protecting family and possessions
Not a cheerful subject
Not a cheerful subject, especially as it is often your death we are discussing! However, you will have insured your house, your car, your contents but what about your life, what about your health? Life insurance pays out a lump sum to your estate when you die, while critical illness cover pays you a lump sum if you are diagnosed with a specific serious illness.
There are two basic types
There are two basic types of life insurance: whole-of-life, and term insurance. Whole-of-life policies cover you until you die/or have a critical illness/or both, while term assurance, which is cheaper, has a fixed term (say, the length of time you have to run on your mortgage). Term assurance will only pay if you die/or have a critical illness/or both within that fixed term. It is worth pointing out that Term Assurance has been actuarially calculated to expire before you do and that is why it is cheap. Whole of life, which is calculated to be in force for the “whole of your life” and pay a benefit at the point of death.
Host of variations
Within these two basic types, there is a host of variations, and each policy will be suitable for a different purpose. Level term assurance offers a fixed level of cover and can be used to pay off your mortgage or to provide for your family, but your level of cover reduces if you choose decreasing term assurance, which can be appropriate if you need it to pay off a repayment mortgage.You can also buy increasing term assurance, which is designed to provide an increasing level of cover over time. This is very useful if you wish your level of cover to keep pace with your increasing salary.
How much do you need?
If your were to die in an accident what figure would your family sue for? How much cover you purchase will depend on two factors: how much you need and how much you can afford. As a rule of thumb, you should buy between five and ten times your annual income, taking into consideration the number of dependents and lifestyle currently enjoyed.
How much can you afford?
How much cover you can afford is a different matter entirely. Opting for term assurance, rather than a whole-of-life policy, will reduce your costs, but may leave you unprotected after its expiry later in life when alternative cover is impossible to obtain. Premiums, which can be fixed or reviewable (they may rise or fall over the term of the policy), vary enormously from insurer to insurer. Quitting smoking will usually reduce your premiums so long as you have been tobacco-free for at least a year.
Whole of Life assurance policies may seem expensive but when basic family protection is no longer required they can be used to reduce your inheritance tax bill. Temple Bar would advise you how to write the policy under trust, which means that the money paid out is not included in your estate when an inheritance tax bill is calculated. Thus whole-of-life policies can be a very effective method of planning now and for the future.
Taking over the budget after your partner dies
*National average salary: http://www.statistics.gov.uk
Copyright Temple Bar Independent Financial Advice Ltd