As an advisor, this is a question I get asked nearly every week and my answer is always the same.
When you’re alive, healthy, and happy, you feel like you don’t need life assurance at all. It’s only when an unforeseen event happens, people start scrambling around to see what they have. However, at that point, it is too late to put something in place. With the benefit of hindsight, everyone should have sufficient life cover in place. The difficulty is that most of us don’t like paying for something that we feel we’ll never use. My role as a financial advisor is to educate clients that adequate protection is something that they need, even when it’s something they don’t necessarily want, in the first instance.
Of course, not everyone needs life cover. If you are young, single, with no children and no mortgage, you may question the need for life cover. Life cover is only needed at certain stages for example if you are starting a family or taking out a mortgage. In the instance of taking out a Mortgage the bank will require you to put life cover in place to ensure that in the event of Death, they get their money back, as the proceeds of such Life Assurance, is assigned to them.
Many believe that once they have a mortgage protection policy in place, then that’s all they need. However, it is important to think about what happens if you then have children. Is a mortgage protection policy alone sufficient to ensure that your spouse and dependents are looked after in the event of your passing?
The answer is inevitably, no. A mortgage protection policy is typically set up on a reducing balance basis, where the level of cover decreases roughly in line with the balance of your outstanding mortgage. This means that if you pass away, the payout (which is generally paid out to the bank) is only enough to clear the outstanding loan. While this will be of great comfort to your surviving spouse, the reality is, depending on your circumstances your spouse may not be able to work full-time and care for dependants going forward. In a scenario such as this, a household goes from two incomes to one. The mortgage may be cleared, but if the surviving spouse/partner cannot maintain a full-time position maintaining a household may be extremely difficult.
This is where the benefit of life cover comes in. It provides a lump sum which can be banked and used to supplement other income such as a widow’s/widower’s pension in order to support your family.
How much is enough?
The answer to this lies in what type of lifestyle you lead and how this would be impacted by the death of you/your partner. Maintaining a standard that you are used to as much as possible is very important should a loved one pass away. How much cover you need, can be calculated by looking at your current income and outgoings and then calculating how this would change following a death. For example, the mortgage might be cleared, so that’s a major outgoing every month that is no longer there, but now the income has dropped to one income or maybe even half of one income if the surviving partner can only work part-time going forward.
When I sit down with a client, we consider all the above. When it comes to identifying a life assurance figure, affordability plays a major role. In an ideal world most people would like to have an excessive amount of cover, however, this may not be sustainable long term.
Putting a realistic plan in place ensures that you’re not overstretching and in some cases over-insuring yourself. By being realistic and putting an affordable plan in place that would look after your family in the case of your death, the peace of mind in knowing that your family is protected properly is hard to quantify. On a personal level, I can empathise with this feeling. When our first child was on the way, I set up my own cover and I felt like a bit of a weight was lifted off my shoulders. I was taking responsibility for this new baby and ensuring that if anything were to happen to either myself or my wife, the baby’s financial future would be safe and secure.
If you are unsure about your current level of life cover, or if you have any questions in relation to this area, please contact me and we can discuss.