I had a bit of a health scare earlier in the year. The first time I dropped down unconscious in the middle of the night in the bathroom and then again in the morning, after a day of tests in hospital they couldn’t find anything wrong with me. I was cleared of having had a stroke and was fit, healthy and young. I was sent on my merry way and told it was likely a reaction to some minor infection. Then it happened again 3 months later…
It was an anxious couple of weeks waiting for a neurologist appointment, where I wasn’t allowed to drive (one potential unexplained fit is allowed, more than one isn’t). Luckily, the neurologist cleared me of having anything sinister wrong with me. Being able to drive myself and my kiddies around again felt great. But not as great as the lifting of the invisible worry which had sat firmly on my shoulder since the second episode; what if something major was wrong with me? I had my family to think about…
Life insurance – a nice to have or a must have?
Throughout my corporate career, I always had a great company pension scheme which included life insurance and critical illness cover. Life insurance at 4 x my salary would have seen my family well provided for in the event of my untimely demise. It was something that didn’t really register as a benefit – I was single when I joined my first employer and having life insurance wasn’t something I had ever thought about. It was just part of the package.
When I quit the corporate life and became a full time mum for a while, I didn’t have any insurance cover. Maybe my judgement was clouded by the fact that we’re in a fortunate position that we aren’t far off paying off our mortgage. My thinking was that if anything happened to my husband, he had more than adequate life insurance to cover the balance on the mortgage and allow us to continue to live as we do now. I could find a job if I needed to if anything happened to him. All very naive thinking really, as it’s not as simple as just having money coming in, what about the children?
And what about if something happened to me?
Life insurance to provide for your children is one of life’s must haves; don’t be blind-sided in to thinking otherwise.
The ‘value’ of the non-breadwinner
Most families think about insuring to replace the breadwinner’s salary first. After all, this is the income which keeps the roof over the family’s head.
However, if you are the second earner in the family, a stay at home mum or the main child-carer in your family, think about all the things you do which enable your other half to go to work.
- School run / club drop-offs
- Food shopping, pack-lunch making and cooking
- Doctor / hospital / dentist visits
This is a HUGELY SIGNIFICANT contribution to family life. If you weren’t around to do all these things, could your partner continue to work as they do now and earn the same? Is it likely that your partner would need to reduce their working hours to care for your children or employ a nanny to take your place?
Studies suggest that the costs of a full-time nanny are approximately £42k per annum. Ouch. Would your partner be able to afford the higher cost of childcare or a reduction in their salary if they reduced hours to take care of children themselves? If not, you need life insurance for both of you. It’s as simple as that.
Is life insurance expensive?
Life insurance policies are actually quite inexpensive in today’s market. Ultimately, the cost depends on the type and level of cover that you select however. There are many different types of life insurance; I am focussing here on insurance to provide money for your family if you or your partner were to die.
Term insurance is the most popular type of life insurance for parents with young families. You select a period of time (the term) over which you are covered. For example, you could choose a 10, 15 or even 20-year term that covers you until your children leave home or are finished university.
How much cover do I need?
Think of all the expenses you would want covered by insurance in the event of your untimely passing:
- Paying off your mortgage so that your dependants wouldn’t have to move home at an already emotional time (assuming you don’t have a separate policy just relating to your mortgage)
- Clearing any other outstanding debts
- Ongoing living costs until your dependents can stand on their own two feet e.g. food bills and utility bills, as well as the cost of running a car, clothing etc
- Future spending e.g. university fees
- Your funeral costs
Add all of these up and you have a starting point for getting a quote for your term insurance.
If it comes down to affordability, getting a level of cover at a premium that you can afford is better than not having one at all.
Critical illness cover
Many people who buy life insurance also choose to take out critical illness cover at the same time. This type of insurance pays out a tax-free lump sum on certain events occurring e.g. if you had a stroke or heart attack, or if you were diagnosed with a serious illness.
Critical illness premiums are typically more expensive than life insurance premiums because there is a much greater statistical risk that you will suffer from a serious illness at some point than you are to die before the age of 65.
While you’re thinking about life insurance it’s a good one to consider as well.
Be smart – write the policy in trust
If you die, your life insurance payout forms part of your estate. This could mean there is inheritance tax to pay on the lump sum payment, depending on the value of your estate. In many cases it’s possible to avoid this by writing the policy in trust, if it’s done at the time the policy is taken out.
If you write the policy in trust, the insurance pays out directly to your dependants, so it never becomes part of your estate, which avoids inheritance tax and it also speeds up the payout.
When you apply for most insurance policies, there will be the option for writing in trust directly at no extra charge. If there isn’t, ask!
This is such an important point that I have written a separate post: Should I write life insurance in trust?
Review your policy regularly
Once you’ve taken out life insurance, it’s easy to just file the documents away and forget about it. Every time your circumstances change – if you upsize your property, have more children etc – you should make time to review the amount of cover you have so that it still offers a high enough payout to cover the expenses you need it to. When it comes to re-assessing your life insurance suitability, make sure you revisit your will also – often the same life events may necessitate changes of both.
As parents, an early passing while your children are young is not something we ever want to think about. Replacing a parent would be impossible, but with life insurance in place, you know that your family wouldn’t suffer financially during a period of significant transition. If you don’t have any life insurance in place for one or both of you, I hope this makes you re-consider its value.