At least one million Britons are thought to be financially responsible for both younger and older family members. And this “sandwich generation” looks set to keep growing as couples leave it later to have children and the older generation lives longer.
Having this dual financial responsibility makes it all the more important to consider how loved ones would cope if you were to suffer an incapacitating illness or even die.
As a healthy working person with a good income you may feel reasonably confident that you are able to provide for your family. But your finances could be more precarious than you think.
This is why financial planners emphasise not just growing your wealth, but also protecting your family with insurance.
There are a range of insurances and protections which can help cover your family and give you the peace of mind that your loved ones will remain looked after.
“There’s much to be said for ‘protecting before investing’,” says Liz Alley, divisional director of financial planning at wealth manager Brewin Dolphin. “If loved ones are relying on you financially, your priority should be ensuring their security rather than taking on investment uncertainty.”
If you have a mortgage and dependants who live with you, taking out life insurance should certainly be considered. This cover should ensure that, were you to die, the family home can be retained. It should preferably also provide an additional financial cushion at such a difficult time.
People who are employees may have what are called “death-in-service” benefits from their workplace, typically equivalent to two to four years’ salary.
A good financial planner will consider what life cover you already have from your employer and elsewhere. And then, where necessary, shop around for extra cover.
The basic type of life insurance is “level term assurance”, which pays out a fixed sum if you die during the specific term of the policy. “Decreasing term assurance” pays out a decreasing sum and is often linked to a repayment-style mortgage. The payout reduces to reflect the declining balance of the mortgage.
Whole-of-life insurance pays out a lump sum whenever you die and has no fixed term. It is often used in inheritance tax (IHT) planning, where it is taken out to cover future IHT liabilities. Where a life insurance policy is written “in trust”, the policy proceeds are IHT-free. The premiums you pay may also be exempt from IHT.
FAMILY INCOME BENEFIT
Family income benefit is a type of life insurance which pays out a regular tax-free income from death until the end of the policy term. Policies often run until retirement or when the youngest child reaches 18 or 21 years of age.
Income protection, sometimes called Permanent Health Insurance or PHI, pays out a monthly replacement income if you are unable to work due to illness or disablement.
“The last thing you want when faced with a serious health issue is increased stress from worrying about money,” says Brewin Dolphin’s Liz Alley.
As with life insurance, it is worth checking first what cover your employer provides: how long would they keep paying you if you could not work for health reasons; would they keep you on full pay; would you be eligible for early retirement, and on what terms?
Income protection insurance pays a proportion of your salary, usually up to a maximum of 50% to 70%. However, because pay-outs are tax free, there may not be much difference to your net monthly salary.
Payouts typically continue until retirement, death or your return to work. You can choose a policy that pays out on an “any occupation” or an “own occupation” basis. The former will only pay out if you’re too ill to do any kind of work, while the latter will pay out if your condition prevents you from returning to your old profession.
An “own occupation” policy will be more expensive than the “any occupation” version.
CRITICAL ILLNESS INSURANCE
Critical illness insurance pays out a lump sum on diagnosis of a range of serious conditions, typically including heart attacks, strokes, certain types of cancer and conditions such as Multiple Sclerosis (MS).
Payouts are commonly used to pay off the mortgage and other debts, while some people cover outgoings such as children’s school fees, which they might not be able to afford if they cannot work.
PRIVATE MEDICAL INSURANCE
Private medical insurance (PMI) can help you obtain medical treatment more quickly than would otherwise be the case through the NHS. It can therefore enable you to get back to work sooner. Particularly for the self-employed and business owners, this can be key to maintaining the income your family relies on.
Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.
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