How would your family cope financially if you passed away? It may be a difficult question to consider, but it could also be an important one. Understanding the challenges your family could face may mean you’re able to identify steps to protect them, including taking out financial protection if appropriate.
Financial protection is a type of insurance that will pay out under certain conditions in order to provide a financial safety net when the unexpected happens.
If you’re considering how to provide for your family should the worst happen, there are two key types of financial protection you might want to consider.
1. Life insurance lump sum payment to your family
If you pass away during the term, life insurance will pay out a lump sum to your beneficiary. Your family would be able to use this money however they wish.
When taking out life insurance, you can choose how much you’d like the potential payout to be. The figure, along with other factors such as, your health and age, will affect the premiums you’d need to pay to maintain the cover. It is also generally advisable that these policies are held in trust, as this ensures they remain outside of your estate for IHT purposes.
2. Family income benefit to provide your family with a regular income
Family income benefit would also provide your loved ones with financial support if you passed away. However, instead of receiving a lump sum, they’d benefit from a regular income for a defined period.
Again, you can select the income your family would receive and the premiums would be affected accordingly.
Life insurance v family income benefit: Which is right for your family?
Both life insurance and family income benefit could provide your family with financial security at a time when they’re grieving. It could mean they’re able to maintain their lifestyle or allow your partner to take time away from work to care for your children.
So, which option is right for you? There isn’t a clear answer, it will depend on your family’s particular needs and priorities.
The one-off larger payment from a life insurance policy could be the more appropriate option if you’d like to provide your family with a way to pay off large financial commitments, such as an outstanding mortgage. You may even choose decreasing term life insurance, where the payout could fall in line with the mortgage repayments you’re making – which would likely reduce the premiums you’d need to pay.
Receiving a lump sum payout could also be the right option if you want to provide your family with flexibility. They could use the money however they wish, from meeting day-to-day expenses to investing the money to create a nest egg for your child. Importantly, life insurance payouts are normally free of tax.
However, life insurance might not be right for you if your partner isn’t comfortable handling large financial sums.
Family income benefit is different in that it provides a regular ongoing income, ensuring your family’s ability to keep meeting essential outgoings. Your loved ones may also find smaller regular payments more reassuring and easier to manage than a larger, one-off lump sum.
The potential drawback of family income benefit is that there is no significant lump sum therefore potentially less financial freedom which could limit their options.
You don’t have to choose between life insurance and family income benefit; you may decide they are both appropriate for your family.
For example, you may choose to take out life insurance so your family would have enough to pay off large financial commitments, such as your mortgage. You could then take out family income benefit to cover day-to-day costs until your children reach adulthood.
While it may be a difficult conversation to have, speaking to your partner about potential concerns and the various protection options could be extremely valuable.
If you don’t already, involving your partner in your overall financial plan could be useful. Suddenly responsibility for important financial affairs and long-term plans can easily prove overwhelming if they come out of the blue.
By including them in financial reviews, they are likely to be better equipped to handle the family’s finances and they may be more comfortable seeking support from your financial planner if they too already have an established relationship.
Contact us to discuss how you could create financial security for your family
As well as taking out financial protection that would pay out if you passed away, there might be other steps you could take to improve your family’s financial resilience. Please contact us to discuss creating a financial plan that places those who are most important to you at the centre.
If you are already a client of ours, your protection requirements will already have been explored. If you have children or grandchildren who may need to consider their protection needs, please let them know we can help.
Risk warnings
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Note that financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions.