There may well have been times when you have contemplated taking out a contract on your other half. Old time American radio comedian Jack Benny summed up his marriage thus, “Not once have we had an argument serious enough to consider divorce; murder, yes, but divorce, never!”
I am not recommending a trawl through the telephone directory for a hitman. I don’t think they’re listed. But stop and consider how you would cope with your family financially without your partner or indeed how your partner would cope without you.
Life insurance tends to be a topic that people don’t want to talk about. After all, it is a straightforward reminder of the finite nature of one’s existence.
While most of us may just about accept that we are not the centre of the universe, we don’t tend to consider how it will manage to rub along without us. But do you really want to leave your loved ones struggling financially at a time when they are also struggling with grief over your demise? Thought not.
So just how does your forward planning compare with what it should be? The average lump sum from a life policy has been estimated to provide just over four years ‘income’ for a family and, what’s more, wouldn’t even cover the average outstanding mortgage loan.
Quite simply, inadequate life protection is likely to mean your family will struggle financially if you die. You will also be struggling if your partner dies – you’ll need to cover child care costs or even give up work yourself to care for them.
The Swiss Re Term & Health Watch 2003 report put the average amount of life cover in the UK at £93,299, less than four times the average salary of £24,700 (Office for National Statistics, Annual New Earnings Survey 2003). Compare it also with the average outstanding mortgage of £105,054 according to the Council of Mortgage Lenders (June 2004). |
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THERE MAY WELL HAVE BEEN TIMES WHEN YOU HAVE CONTEMPLATED TAKING OUT A CONTRACT ON YOUR OTHER HALF
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It is fairly obvious a lot of us are grossly underinsured, which raises the question, ‘How much life insurance does a person really need?’
The amount will vary according to your personal circumstances. If you are young, free and single you don’t need huge life insurance policies, just some sensible lifestyle choices – restrict your drugs consumption to the legalized variety, don’t drive or operate machinery while under the influence and try not to indulge in unprotected intercourse with a large number of partners.
Most people, when pressed, would maintain their life is worth a considerable sum, but the amount they insure it for always ends up being dictated by the premium that has to be paid.
Life insurance comes in two basic flavours, whole of life and term. As the name suggests, ‘whole of life’ policies pay out on death, whenever it occurs, while ‘term’ insurance offers to pay out on death during a fixed time period – if you make it past the end of that period you get nothing. In other words, ‘whole of life’ policies you may regard as a form of very long-term saving for your family’s benefit while ‘term’ policies are a bet – you are betting that you are |
going to die and the insurance company is betting that you aren’t!
The good news is that the cost of your bet has gone down in the last few years or to put it another way, the odds on you dying have lengthened! Why? One of the main reasons is the Aids epidemic that wasn’t. At the turn of the millennium life assurance firms reviewed their premium charges in light of the change in perception of the threat of Aids. At the turn of the previous decade, premiums had risen significantly as the life assurance industry entered the 1990s worried that the disease would have a substantial impact on UK mortality rates.
As we now know, the feared Aids epidemic did not materialize in the Developed World. Let’s take the example of a non-smoking, married man with children. He’s 35 years old and earning the UK average salary of £24,700. Ten times his annual salary would be adequate cover should he die. Cover worth £247,000 for a 20-year term can be arranged at a cost just over £5 a week!
Whatever form of protection you and your partner choose, it should be written ‘in trust’. This is easily arranged and is often presented as an option when you take a policy out. If written on a straightforward ‘own life’ basis, rather than ‘in trust’, the policy’s sum assured will form part of your estate.
Even if you’ve made a will, your chosen heirs will have to wait until grant of probate (often several months) to collect the money. If there’s no will then the sum assured will be distributed according to the rules laid down by the law of intestacy.
Also, if the sum assured lifts your estate value above the inheritance tax threshold, then tax will have to be paid. By contrast, a policy written ‘in trust’ does not form part of your estate and will pay out immediately, without waiting for probate. That means your family needn’t suffer financially as well as emotionally. |
