Thinking about what your death would mean financially for your family is often a subject many would rather avoid.
But unfortunately, with so much uncertainty in life, it is a subject which needs to be broached.
Without the proper precautions in place, your family could be left without the funds to;
- Keep up with mortgage repayments
- Pay for additional childcare
- Meet day-to-day living costs
- Pay for your funeral.
The average mortgage debt in the US is currently $201,811, whilst the average personal debt is $52,458. Significant sums of money and ones which could leave our loved ones vulnerable.
Luckily there are a number of solutions to make sure that if the worst were to happen, your loved ones would be financially secure.
Family life insurance
One of the most common forms of protection is family life insurance.
Typically speaking there are 2 main types of family life insurance policies;
- Level term life insurance
- Decreasing term life insurance.
Both decreasing term and level term policies are term-based and only provide cover for a specific period of time, (around 20-30 years).
If you pass away during this period, your loved ones will receive a lump sum payout.
The key difference between these two policy types is the sum assured.
The payout sum holds its value with level term life insurance meaning that regardless of when you pass during the policy, your loved ones will receive a fixed lump sum. This makes it ideal for covering an interest-only mortgage or other fixed costs.
Decreasing term cover, on the other hand, has a payout sum which reduces over time. This makes it ideal for covering the remaining balance of a repayment mortgage, where the sum assured can be set to reduce at the same rate as the outstanding balance.
Both forms of family life insurance are ideal for those with younger families and large outstanding debts who can use their good health and younger age to benefit from lower monthly premiums costs.
Life assurance policies last for the rest of your life and therefore, guarantee a payout for your loved ones.
For those in later life, this longer lasting protection may be more appropriate.
There are two different types of life assurance policy available;
- Whole of life insurance
- Over 50s plans.
Similar to term-based cover, whole of life cover provides the opportunity for a large level of protection and takes into account your personal circumstances (such as age and health) as a means of determining your monthly premiums cost.
An over 50s plan, on the other hand, offers a much lower level of cover but does not require you to provide any information regarding your wellbeing.
This means that those who suffer medically and are therefore unable to obtain cost-effective cover through offer means can still solidify some protection.
Both forms of life assurance will provide your loved ones with a lump sum payout (albeit one far more significant than the other), with which they can choose to use as they deem fit.
This could be to cover outstanding debts in your name, pay towards your funeral or simply provide a reassuring nest egg.
Writing your life insurance in trust
Both life insurance and life assurance policies provide your loved ones with a lump sum payout which contributes towards the overall value of your estate.
Writing your life policy in trust will detach the payout sum from the value of your estate, resulting in your loved ones receiving 100% of the payout amount and reducing the overall amount they would be required to pay inheritance tax on.
This process also avoids your life policy having to go through probate, meaning that your loved ones will have faster access to the funds.
Finally, writing your policy in trust will allow you to specify how you would like the proceeds from your policy to be distributed, giving you more control to ensure your parting wishes are carried out (although this is at the discretion of your trustee).
Family income benefit
For those with younger families, aiding with day to day living costs is likely to be essential if the worst were to happen to you.
How would your family continue their current standard of living if your income was no longer present?
Family income benefit allows you to provide your loved ones with a tax-free monthly income if you were no longer around to provide regularly.
This involves stating how much you would require your family to receive on a monthly basis and for what period of time you would like them to be covered for (usually until your dependents become financially stable).
For example, if you were to take out a policy providing your family with $1,500 of income for 25 years and then passed away 12 years into the policy, your loved ones would receive a payment of $1,500 for the next 13 years.
This could help cover day to day living costs such as bills, food, and even rental payments, allowing your family to continue their existing standard of living.
The average cost of funerals has risen significantly over recent years and shows no signs of slowing down.
$7,360 is the average cost of a funeral with viewing and burial – (source:www.nfda.org/news/statistics).
Arranging a life insurance policy allows you to cover the cost of your funeral as well as securing today’s rates, therefore avoiding any further increases in cost.
This can be ideal if you are looking to purely cover the cost of your funeral, however, can only be used for exactly that.
Therefore, if your ideal scenario of protecting the financial future of your family is providing them with an inheritance or paying off your mortgage, unfortunately, this option may not be for you.
It is also worth noting that funeral plans are often criticized for not covering all third-party costs – including doctors’ fees, minister fees, and cremation/burial fees.
Whilst the average cost of a funeral is rising significantly as are the other associated costs.
This means that even with the presence of a funeral plan, your loved ones may be required to find a significant amount to give you the send-off they see fit.
Some funeral plans will offer a contribution to this amount (or in the rare occasion the full amount), so it is essential to ensure when arranging a funeral plan, you get the right one to suit your needs.
The largest benefit of a funeral (besides freezing today’s funeral costs) is that they are available to anyone regardless of your age or health, allowing the option to provide your loved ones with financial support regardless of your age or health.
Multiple policies for overall protection
As we have discovered, there are a number of ways to protect your family even once you are no longer around.
Choosing the best solution for you will depend on the type of cover you are looking for to support your family.
A form of life assurance or life insurance may be ideal if you want to allow them to choose how best to use the payout or a funeral plan may be best suited if it is purely your funeral costs which are of worry.
The good news is, that whilst certain types of cover are best suited to certain aspects, it is possible to have multiple layers of cover in place at once.
For example, a funeral plan to cover the cost of your funeral and a whole of a life policy to cover the third-party costs, the remainder of your mortgage and a small inheritance for those you love the most.
Regardless of the cover type(s), you choose the best fit to your needs; it is always best to compare quotes to ensure your particular solution covers everything you need as well as being the most cost-effective.
This could be done in one of three ways;
- Carrying out research independently – Although this can be time-consuming, it can allow you more control
- A price comparison website – Extremely easy but often only compares a small select panel of suppliers
- An insurance broker – Compares a large panel of providers, helps to decipher any technical jargon but can often come at a cost.
The key to whatever option you choose is ensuring the cover is right for you, your budget and your individual requirements.