Welcome back for the second blog in our series, “planning with purpose”.

In the first blog, I mentioned that talking about death doesn’t have to be all doom and gloom. We also tackled the big stuff - why you should talk to your loved ones about your plans, why a Will is incredibly important and how trusts and gifting can help you minimise your tax liability. In this blog, we’ll touch on the subject of a very unloved product: insurance.

Let’s face it, no one likes talking about or paying for insurance. After all, it’s something we hope we’ll never need. For example, we get all excited when we purchase a new home (even with an eyewatering mortgage), however, the gloss is taken off that initial excitement when the mortgage adviser then asks if you would like to explore insurance options to protect your debt. Your mind switches off as you don’t really want to think about getting unwell or dying. For me, it’s about understanding the value that insurance can add to your overall financial plan and how to make sure you are getting the insurance that is affordable for you.

Insurance offerings

Below, we’ll look at some of the main insurances on the market and what each of them offer.

Level term insurance

Level term insurance pays a fixed lump sum on death during the policy term. You can insure yourself to cover debt, school or university fees for your children, or to protect a gift should you be in a fortunate position to have an Inheritance Tax liability.

Decreasing term insurance

This is similar to level term insurance; however, the pay out decreases over time, just like your mortgage balance. Cheaper than level term and perfect for covering debts that shrink over time.

Family Income Benefit (FIB)

You may have had some knowledge on the above two policies; however, FIB provides income instead of a lump sum for the rest of the policy term and is typically more affordable than income protection.

Income protection

Income protection pays a regular income if illness or injury stops you from working and typically covers 50-65% of income until you recover or retire.  Although this seems considerably less than what you are currently getting paid, the payments are paid gross and after income tax it can be closer to your take home pay than expected.

Critical illness cover

This pays a tax-free lump sum if you’re diagnosed with a serious illness like cancer or have a heart attack or stroke. Critical illness cover typically complements term assurance and income protections.

Who benefits from insurance and what are the costs?

The majority of people would benefit from taking out some form of the insurances mentioned above, but there are some key things to consider:

• If you have debt, such as mortgages.
• If you are looking to protect gifts from Inheritance Tax.
• If you would like to ensure you have income if you are unable to work.
• If you require a lump sum, should you suffer a critical illness.

By taking out insurance that is suitable for your needs will ensure loved ones aren’t left in the lurch if the worst happens. Naturally, the older you get, and if you have underlying medical conditions, the more costly insurance will be.

Premiums are relatively cost-efficient on Level, Decreasing and FIB due to the likelihood of your beneficiaries having to claim this insurance, as terms typically run until you are debt-free, or your children become financially independent. One caveat to this rule is that if you are taking out a policy to protect a gift, you may have an Inheritance Tax liability. Typically, you will be older and therefore, premiums are likely to be more costly and run for an extended period into an older age.

According to the Office of National Statistics, the average longevity of a man or woman aged 30  is now 85 and 88 respectively. Therefore, the risk to the insurance company of having to pay out on a term insurance policy is relatively low, which is reflected in the more cost-efficient premiums.

Premiums for critical illness and income protection are generally more expensive due to the likelihood of you having to claim within your working life.

Affordability

Affordability is one of the most important things to think about. It’s about understanding the benefits for you and your situation, and if the premiums fit into your budget. If you are proactive with insurance, you must identify the most important insurances that you need and plan out a monthly budget to pay for them.

Trusts

If your insurance pay out could make you exceed your Inheritance Tax band, on top of your death-in-service from your employer, you may wish to place your term insurances in trust for your executors/beneficiaries to avoid a nasty Inheritance Tax bill.

Conclusion

Term assurance and critical illness cover is the financial equivalent of ‘better safe than sorry’. It’s there for your family, even if you’re not.

Some key points to consider:

• Start young - the earlier you buy, the more cost-effective it is.
• Match your needs - level term insurance for fixed costs, decreasing term for mortgages, family income/income protection for ongoing support and critical illness for unexpected health scares.
• Make sure premiums are affordable and that you understand your cover.
• Review regularly - life changes, so should your cover.

Stay tuned for part three, where we tackle Inheritance Tax.

If you would like to discuss any of this further, please don't hesitate to get in touch with a member of our Wealth team or by filling out the short form below.

Disclaimer: Johnston Carmichael Wealth Limited, now owned by Partners Wealth Management, is authorised and regulated by the Financial Conduct Authority.

This communication should not be read or considered as financial advice. While all possible care is taken in the preparation of this communication, no responsibility for loss occasioned by any person acting or refraining from acting as a result of the information contained herein can be accepted by this firm.