Questioning the need for life cover

WITH the multitude of policies available, buying life assurance can feel like entering a labyrinth. Even many savvy personal finance buffs avoid the subject. Considering its morbid nature, one can see where they are coming from.

But life assurance is one of the fundamental pillars of shrewd wealth planning, and avoiding the subject is one of the biggest financial mistakes that you can make. “You would be severely letting down your dependents, and that is not the attitude of a responsible breadwinner,” says Jason Witcombe of Evolve Financial Planning.

Asking a few basic questions will help you understand whether you actually need cover (many people don’t), and what type of cover is best for your circumstances.

Personal circumstances vary, and there is rarely any financial advice that applies to everyone. This is especially true when it comes to life assurance. The key is to understand what it is that you are trying to protect. Witcombe says “insurance is about peace of mind,” and most people look to take out cover to protect their dependents from financial hardship in the event of their death.

With 52 per cent of households reliant on a single income, families are vulnerable to changes in economic circumstances. However, Scottish Widows estimates that there has been a 6 per cent fall in the number of people taking out life assurance since 2011, and just 38 per cent now have such protection.

But not everybody needs life assurance. It is suitable if you have dependants and outstanding debts, such as a mortgage. However, if you are a single person renting a property, it is likely that you don’t need it.

Before diving in, review the cover that you already have. Many employers provide death in service policies that typically cover four times an employee’s salary. Some employees also have access to flexible benefit packages, which allow you to pick and choose the benefits that you want, enabling you to beef up any cover that you already have. This can be a cost-effective way to get more cover, so you should ask your company for details about the policies that they have in place.

However, Witcombe argues that most employer-provided cover is “probably inadequate”. He also says that you should avoid putting all of your eggs in one basket: “If you lost your job and became ill at the same time, you could end up losing your cover too.”

It is a mistake to just pluck a number out of thin air and assume you are sufficiently covered. A better approach is to carefully look at what future liabilities you have. For example, consider your outstanding mortgage and any other debts. If your dependents are used to a certain lifestyle – such as private schools for your children – you should factor in these expenses.

The more cover you need, the more expensive your policy will be. But “there are no rules of thumb” in deciding how much cover to take out, Witcombe says. “Bear in mind that your salary is irrelevant; your expenses – and those of your dependents – are the issue to consider.”

Sarah Lord of Killick & Co says that the right policy is dependent on your own circumstances, and “most people only need basic cover”.

The most common type of policy is level term assurance, which pays out a lump sum (that remains the same throughout the term of the policy) upon death. This is useful for those with young children, who only need to ensure that they have cover until their children are older and able to support themselves.

A decreasing term policy, in which the amount that you are covered for reduces incrementally over the term of the policy, allows you to match cover levels to your mortgage liability. This is usually a cheaper option than level term policies. Conversely, there are rising term policies that may be appropriate if you envisage your debts increasing in the future.

Some policies pay an income instead of a lump sum. If you have a non-working spouse, then this may be appropriate. There are also options to link income policies to inflation, so that dependants do not lose out in real terms. Again, these tend to cost more.

Where possible, Lord advises that married couples have separate cover. But “it comes down to affordability,” since two policies are likely to be more expensive than one joint policy. Witcombe cautions against “over-covering” yourself, arguing that you should have a very specific reason for taking out separate policies. It should not be done as a matter of protocol.

If you have a very specific idea about what you are after, price comparison websites can be useful. But, for most people, specific advice may be more helpful. “It is good to shop around, so make sure you do,” says Witcombe. But life assurance forms a critical part of comprehensive wealth planning, and an adviser may be able to help find the most appropriate, cost-effective cover.

Lord advises that whichever way you buy, whether through an adviser or directly with a life assurer, you should buy a policy that is structured as part of a trust: “Think about the implications of inheritance tax.”

Katya Maclean of Scottish Widows says that there is “no ‘normal’ time to buy,” but it is always the right time to give the matter some thought.

Women may want to consider their position sooner rather than later. Due to gender legislation coming into effect on 21 December, requiring insurance premiums for men and women to be equal, it is likely that premiums will rise for women.

Clearly, there are tough questions you should ask when considering buying cover. The process can be daunting, but if you are still not sure if life assurance is right for you, Maclean advises that you “as for help”. Cover may or may not be appropriate for you, but if you have dependents, you should give some thought to the matter. You will rest assured, safe in the knowledge that in life and in death your loved ones are covered.