Protecting Family
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, and depending on that adult not only emotionally but financially. The loss of this person and the income they bring into the household can severely affect the future of remaining family.

For this reason life insurance is essential to ensure that that future is protected. That 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:- a Family Income benefit or a 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 dependence such as 21.

Firstly, a Family Income Benefit (FIB) 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 FIB of £10,000 per annum over ten years dies after 2 years of the policy being in force. The policy will then 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 to a 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.

Conversely, a Level Term Assurance (LTA) is structured to pay out a fixed sum assurance is if a death happens at any time during the policy. For example Mrs. Smith has a LTA 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 FIB, it is also possible to inflation-proof the LTA by linking it to the Retail-Price Index. Another option which may be of particular benefit with the LTA 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 Inheritance Tax of anything over £275,000.

For example, unmarried Miss Wilson dies and leaves an estate to the value of £375,000 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.

How Much Cover?

If you’re the main breadwinner, you will want to keep your family in something like the style to which they have become accustomed. If you’re a carer, then you want to provide cash for professionals to take over because you’re not around.

How Long For

Until your dependents are financially able to look after themselves, 20 years is about right for most people or until dependents complete full time education.
For most people as they get older liabilities diminish and savings accumulate, consequently one takes the place of the other and therefore reducing the necessity for life insurance. One could also argue that this in its self creates another problem, one of Inheritance Tax, and here life insurance cover, written in trust can be particularly useful.