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The urge to protect a new-born child is, without a doubt, one of the most powerful feelings any dad can have. Protection can sometimes mean ensuring that if anything happens to you, your family will continue to be provided for. For many parents, it means having adequate life insurance.
Should you have life insurance?
Simple answer: yes. You need to know that your family will receive a lump sum payment (or sometimes an annual income), if you should pass away.
How much life cover?
The simplest calculation is simply to multiply each family income-earner’s salary by 20. For example, if you earn £25,000 a year, you should aim to have life cover worth £500,000 in place.
It sounds a lot. But in fact, this amount is needed because the money will deliver an estimated income of about five per cent without risking the lump sum itself.
What type of cover?
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Term cover
The main type of life insurance nowadays is so-called term cover: you insure your life for an agreed amount over a set number of years. If you die, the policy pays out. If you don’t die, the policy lapses at the end the term.
Life insurance is relatively cheap. For example, a typical non-smoking male aged 30, taking out cover worth £200,000 for 25 years might pay just £12.20 a month.
It always pays to shop around for a quote.
Family income benefit (FIB)
Some people prefer to ensure their families will receive an annual income rather than a lump sum.
This is what family income benefit (FIB) policies do: you decide on the income and the number of years you want it to last, then insure for a set number of years – usually until your children are grown up.
The policy will pay out on your death.
Note that the policy is decreasing: it pays out over the remainder of the term itself.
Which means if you die with ten years to go, it pays out ten years’ worth of income. If you die after five years, that’s what the policy pays, and so on.
The advantage of these policies is that because they are decreasing, they can be cheap. For example, a policy paying £20,000 annually over a 25-year term might cost £15 a month for a 30-year-old.
Writing a policy in trust
When you take out life insurance, you don’t want payouts to fall foul of inheritance tax. Also, you want the money to go to your dependents quickly.
Writing an insurance policy in trust ensures this can happen.
Most insurance companies have standard forms for doing this and it usually costs nothing to write your policy in trust.
Life-of-another
A husband may take out insurance against the life of his wife, and vice versa. But they MUST have an “nsurable interest in the life of the person covered.
This means that one must stand to lose financially if the other were to die. Husbands and wives are automatically assumed to have unlimited insurable interest in each other’s lives.
A life-of-another policy taken out by one parent – with the children being identified as the beneficiaries – also protects the family against the loss of maintenance payments if the couple split up.
This is why you make sure that such a policy is in place, for your children’s sake.
Author
Nic Cicutti is a journalist and broadcaster. An award-winning former personal finance editor at The Independent and editor of the Financial Times’ website FTyourmoney, he tries to practice what he preaches but doesn’t always succeed.
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