This episode of the Your Recipe for Financial Success podcast was published on 3rd December 2020. You can listen again by heading to our Episodes page, or on your favourite podcast player.
In this episode, Becky, Emma and Julie are whipping up all the ingredients that you need to put Life Cover in place.
Life Cover is an important but often overlooked ingredient in the cake of financial security. Now, we understand that no one really wants to think about their unexpected death, but it’s so important for those you would leave behind.
There’s no doubt that you would want your family or financial dependents to continue enjoying a lifestyle you are used to. If you don’t have Life Cover in place, however, they could be left struggling.
Why do you need Life Cover?
As we have just touched upon, you don’t want to leave anyone in a sticky situation once you have baked your last cake, if you catch our drift. Your family will no longer be receiving the income you bring in every month and so may find it more difficult to make ends meet.
There are three Ds to remember when thinking about putting Life Cover in place:
- Death duties
Having Life Cover in place will make sure all of the above financial liabilities are taken care of. In addition, your family will still be able to live a comfortable life.
How does Life cover work?
Life Cover pays out a sum of money when you die. This money can be used by your family to:
- Pay off your mortgage and other debts
- Supporting your children or other financial dependents
- Covering Inheritance Tax (IHT) liabilities
- Paying for your funeral
How much cover do you need?
The amount of cover you need in place completely depends on your situation, and what you are hoping to cover when you are gone. For example, you may want to make sure your children are financially comfortable until they are 25. If they are 10 years old now and you want them to receive £20,000 a year, you will need to have 15 years worth of cover at £20,000 a year to see them through.
Maybe you want to make sure your partner can pay the mortgage off. In which case, you should organise cover for the remaining balance.
Or, if you don’t want your family to have to pay for your funeral, that could be the level of cover you are looking for. To give you a starting off point, the average funeral currently costs £4,267.
How long should your cover last?
Again, this depends on what the payout would be covering. In the mortgage example, if you have 25 years left on your mortgage it makes sense for your cover to last that long too.
It’s important to realise here, if you survive your Life Cover policy, you will not get anything back from it.
Types of Life Cover policies
There are a range of policies to suit, including:
- Single life policies
- Joint life policies. With these types of policies you can choose whether the sum pays out on the death of the first person (helpful for covering the mortgage) or on the second death (ideal for covering IHT liabilities)
- Level amount policies. These would pay the same lump sum no matter at which point in your term you pass away. It’s important to realise this type is affected by inflation.
- Index linked policies. These go up in value in over the period of time.
- Decreasing term policies. These reduce in value over your policy term. These are a good option if you want it to pay off a mortgage.
It is possible to tag on cover, such as Critical Illness cover, which would pay an additional sum on diagnosis of a listed illness.
How to find Life Cover
First of all, you will need to work out how much cover you will need. Aviva’s Life Cover Calculator is a great place to start if you are unsure.
Once you know the level of cover you would like, you can head online to comparison sites, or directly to your preferred supplier.
If you are still a little unsure about the level or type of cover you need, it’s a good idea to speak to a financial adviser. They can find out exactly the cover you need and then research the whole market for you – they may even find some great offers you could take advantage of.
We hope you are now full up on everything you need to know about Life Cover! If it’s left you hungry for more, check out our other podcasts on our episodes page. Don’t forget about our Facebook page too where you can ask questions and join in discussions about all of our topics!
Rediscover the conversation
Can you hear the Jingle Bells girls? I hope you’re ready for Christmas, it’s getting close now!
It is indeed. I’m dying to ask you Emma, have you done any Christmas baking yet?
Well I’ve cheated a little bit this year.
So I’ve tried to make a gingerbread house before but my gingerbread was a disaster as it didn’t hold the structure. I’ve been clever this year and bought the gingerbread biscuits ready-made so I have just been decorating them!
So in today’s episode we are going to be whipping up all the ingredients that you need to put in place Life Cover. Emma, do you want to start off by telling us what Life Cover is?
Of course I can. So, Life Cover is designed to pay out if you die. It’s not necessarily the cheeriest of subjects, but it’s obviously an important thing to talk about!
When you die, it’s designed to pay out a lump sum to your loved ones, which is going to make life easier for them. Obviously if your income stopped or they haven’t got any money coming from you anymore they’re going to possibly need some extra money. So it just kind of gives them another start, basically.
Why should I have Life Cover?
If you have pets, would you have insurance for your pets?
Well I used to for my cat, so yes.
So would you say you value your pet’s life more than your own?
No, probably not.
It’s a tricky question for some people maybe, and pet insurance can sometimes be incredibly expensive, but it is something that we wouldn’t go without. We’d make sure that we have it in place to ensure we could afford to care for our pets.
Why wouldn’t you do it for yourself too?
That’s a very good point. Why wouldn’t you, Emma?
Hopefully, today we’re going to answer some questions about why you would put Life Cover in place and it might get you thinking that it’s something you’d like to do now.
When you’re thinking about life cover there’s three different things that you need to think about. Those three things all begin with D and I think we’ve probably spoken about these before. So the three Ds, are Debt, Dependents and Death Duties.
The first D, for Debt, is for whether you have, say, an outstanding mortgage or any credit cards or even car finance that would need to be paid off should you die.
The D, for dependents, would be if you’ve got anyone financially dependent on you, whether that be a child or a husband or wife or any other member of your family. Even someone that you’ve just always looked out for and always given some money to on a regular basis to help them out. If you’re not there to continue doing that for them, who’s going to?
And then the final D is Death Duties. When you die, are there any extra bills that need to be paid? Maybe for example you’ve got an inheritance tax liability that needs to be paid. Having some Life Cover in place could pay out to cover that liability so your family don’t have to worry about finding the money.
Another reason could also be to pay for a funeral. In some cases people don’t have enough savings to actually cover the funeral costs. We have certainly heard of people crowdfunding for funerals recently.
That’s very true, really good point, Julie.
There’s several different things that you’d need to consider when looking at Life Cover. We’ve talked about the importance of reviewing financial affairs in the correct order before, when we talked about PIPSI in a previous episode. You may want to go back and listen to that episode if you haven’t already.
Several years ago one of my colleagues met a gentleman, and he came to us saying that he wanted to invest £100 per month into an ISA. So, we went through all the steps that we would normally do to find out about his circumstances. During the discussion we found that he had no life cover in place, but he did have a wife and a young daughter.
During the conversation, one of the things that we recommended was that he considered putting Life Cover in place but he completely refused to do so. He decided that his priority was still his ISA. He set up the ISA and he started making contributions into that as he wished.
After three months of paying in £100 he unexpectedly died. It left his family in absolute turmoil because all they then had was the £300 that he’d saved into an ISA. If he had set up a Life Cover policy, dependent on the cover he had put in place, his family could have had a lot more money paid out. Thousands possibly, which could have changed their lives and set them up for the future.
It just goes to show that hindsight is a wonderful thing! If we knew what was going to happen in the future, we’d obviously make sure we take all the precautions now to stop things like this happening.
What would you say would be the first thing for our listeners to think about when they decide how much cover they might need?
Okay, working out how much cover you need can depend on lots of different factors.
You could be worried that if you die you would be leaving your partner to pay off the mortgage alone. If it was paid off your family could then live comfortably. If this is the case, the value of your mortgage would possibly be the amount of Life Cover you’re looking for.
It could be that your children are 10 years old and you want to make sure that they would be financially secure until they’re 25 and have left home. In this example you might be thinking that you need cover equivalent to your income. So say your income was £20,000 per year, you might think I need £20,000 times 15, which is going to take them to the age of 25 and that’s how much cover you would need to see them through.
There’s not always a right or wrong answer as it often depends on your circumstances. But there are things like Aviva’s Life Cover Calculator, where you can go, put in a few details and it’ll help to give you an idea of what kind of cover you might need in place.
Just as an example, the average household with a mortgage owes around £125,860 at the moment. That could be the amount that you would need in place to cover the balance on the mortgage, if you were that stereotypical average person.
The average funeral cost at the moment is £4,267. As Julie mentioned earlier about people not necessarily having enough savings for funerals, your priority might be to have enough cover in place to afford a funeral. You could look at putting cover in place for the average cost for a funeral.
In a nutshell, it depends on your circumstances to know how much cover you would need.
What about how long the cover should last for?
Again, you need to think about your circumstances. So if, as I said, you’re looking for cover to pay off your mortgage, you might be thinking well my mortgage has got a 25 year term. At that point it will be paid off so then it wouldn’t be a liability I’d be worried about anymore. You might want your life cover to last 25 years to match the time left on your mortgage.
Or, it might be about when your children are going to reach financial independence. What age do you expect that to be? Is it 18, 21 or even 25? It could be older, it entirely depends on on your family and your situation.
It’s basically making sure it’s going to last for as long as the liabilities might exist. It may even be 5 or 10 years, it doesn’t necessarily have to be a very long term. It can be a short term, but having that cover in place could be really important for you.
So if you’re a married couple and looking for Life Cover, would you have a policy each or could you have a joint plan?
You’ve got the option to do what you like, the plans can be on a single life basis or a joint life basis.
If it’s on a joint life basis, you have the option of the sum assured being paid out either on first death or second. So as an example, if you have a joint mortgage, and you want that mortgage to be paid off immediately if one of you were to die, you could have that set up on a joint life first death basis. This means as soon as the first person dies, that money would be paid out and it would pay off your mortgage.
An example of when you might use a joint life second death policy would be to cover an inheritance tax liability because you only pay the inheritance tax when the second person of the couple has died. You wouldn’t need that money to pay out on the first death, you’d want it once the second person has died and then it would pay out to potentially cover your liability.
If I take out a Life Cover policy today, will the amount I am covered for always stay the same, or will it change throughout the duration of the policy?
That’s a good question, Becky! You could either have your policy so it’s just level amount so it’s going to pay out the same amount on day one as it would at the end of the plan. With this it’s important to take into account things like inflation which may affect the buying power of money, meaning the sum assured would lose value over time.
You could have what we call an index linked policy. What that means is it’s going to go up in value over the period of time that you have the policy, so this type of plan could counter the effect of inflation on the sum assured.
What about a policy that goes the other way then? If I can have one that goes up in value, can I have one that goes the other way?
You can. What that would be is a decreasing term policy. So an example of this would be a policy which at the start has a sum assured of £100,000 and say you want the policy term to match up to your mortgage end date, which has another 10 years left to run.
Over that 10 year period, the £100,000 sum assured is going to go from £100,000 down to zero in line with your mortgage balance. You may choose to take out a policy that’s going to reduce each year, so that the level of cover goes down. Say you made a claim in nine years’ time, it might only pay out just £15,000 but it’s still going to be enough to clear all the remaining liability you have with your mortgage.
So, I had a friend who died, and her family then got a quarterly payment from a Life Cover policy. That doesn’t sound like what you’ve just described though?
What your friend probably had is what we call a Family Income Benefit policy.
The difference between a Life Cover policy and a Family Income Benefit policy is the Family Income Benefit is going to pay you regularly. A set amount for a fixed period of time rather than one lump sum at the time of death.
This may be a really good option if you have financial dependents and you wanted to replace your income for X amount of years, until they reach financial independence. This way rather than having a lump sum all at the beginning, that you’ve got to manage and make to last until they reach 25, you’ll have a regular income paid instead.
In the case of your friend, it’s paid on a quarterly basis that they can then use for the purposes that they need to use it for.
Would that plan be a lot cheaper than for a normal term assurance plan?
They do tend to be cheaper because of the difference being with a Level Term Assurance on day one you’d get £100,000 pounds and say 10 years later, you’d still get £100,000.
Whereas, with the family income benefit plan, what happens is it reduces over the 10 year period. Say you wanted it to pay out £10,000 a year, in year one you’d get £100,000 over the course of the policy. But if you made a claim in year three, it would be £30,000 less because it’s been running for three years. So it reduces by that amount each year.
So what happens if you don’t die?
If you don’t die and you get to the end of the term of the policy that means the policy ends and that’s it, you don’t get anything from it.
What about if I get ill with like something like cancer? What would happen with the policy then?
So you normally have the option to be able to add things to a Life Cover policy, one of those being critical illness.
What that then means is that your policy would pay out on diagnosis of a critical illness or on death. Sometimes, depending on the type of policy you’ve got, it may even pay out in both scenarios. If you were to be diagnosed with cancer, or any one of the illnesses that would be on the providers set list of illnesses that they would cover, then however much you are covered for at the time would be paid out at that time of diagnosis.
Presumably there’s a difference in how much the Critical Illness cover costs compared to the Life Cover then?
Yes, if you add Critical Illness cover on to a Life Cover policy it is going to bump the premiums up. Obviously you have got an increased level of cover, so it’s going to be able to pay out in more than one circumstance, possibly.
So do different providers cover for different illnesses?
Yes, most of them have a standard set of illnesses that they will pay out for, but sometimes you can find ones that will cover special conditions. If you’re looking for something that covers a lot more you’d need to look into the details of the policy to see what it does cover.
If they cover more they tend to charge a little bit more as well, so it’s something worth considering.
And how do I get Life Cover?
There’s lots of different ways you can get Life Cover. You could go online to comparison sites or you can even go direct to providers online. Or you could speak to a financial advisor. An independent financial adviser would be able to look at the whole market, and do some research for you and tell you what offers there are out there.
Excellent. So you told us actually a bit of a sad story earlier on. Have you got a nicer, lighter story to end the episode with?
Yes, I have. We have some clients that took out a Life Cover policy with critical illness, they were quite young clients, actually. Out of the blue, because nobody ever expects it, the wife was sadly diagnosed with terminal cancer.
The critical illness part paid out immediately which meant they could go out and enjoy things while she was well enough, whether it be Disneyland Paris with the children or anywhere else. They had the money to be able to do it and make memories together and have happy times before the inevitable was going to happen.
Then sadly when she did pass away, the life cover part paid out as well. So, on the wife’s death a second lump sum was paid off which meant the husband could then pay off the mortgage early and continue to live on with his children and all these happy memories of his wife.
Thanks. Thank you for that. That was great Emma. I know we’ve got another episode lined up to discuss Life Cover and businesses on another occasion.
We certainly have. I think that wraps us up todays episode so thank you very much.