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Last updated: 02 June 2021
There are several types of life insurance that you could consider:
The amount of coverage that your family needs depends on what costs they’d need to pay if you were no longer around, and for how long. Think about expenses like:
The cover amount that you take out should at least cover the money that you have left on your mortgage, so that you don’t leave your family struggling to keep up with repayments. You should then consider adding more financial cover so that your family can continue living at the same standard that they are used to. Generally, this figure will be around ten times your annual salary.
If you want to make sure your family has financial security beyond your death, you might want to consider further options in addition to basic life insurance cover.
This is not normally offered as a standalone product but as an addition to a life insurance policy. It can prove invaluable if you become really ill unexpectedly. This extra will give your family a payout if you’re diagnosed with a listed critical illness during your policy term.
However, if you have critical illness cover combined into your standard life insurance policy, you will still only get one pay-out. This will be either when you’re diagnosed with a critical illness or when you die. The policy won’t pay out for both. Also, adding critical illness cover will increase your premiums, as you are provided with greater coverage.
Some insurers also offer children’s critical illness cover. This can be added onto a parent or guardian’s life insurance as an extra. This could cover the cost of looking after your child, or any additional medical bills that might occur if your child were to become critically ill. You would receive a tax-free payout at the time of diagnosis, to provide your family with financial support.
You can also take out a whole of life policy for your child. This can help to secure a lower monthly cost of life insurance for their whole life.
You might also take out life insurance for your elderly parents, to help pay for any costs that you might need covering if they were to pass away, such as debts, inheritance tax or funeral costs. You will need their consent before taking out a life insurance policy for them.
A life insurance payout is normally tax-free. But if your policy isn't written in trust, then your family might have to pay inheritance tax on any money that they receive. Inheritance tax is normally due on the value of your estate above £325,000. Your estate is made up of everything you own, including cars, money, and jewelry, as well as your life insurance payout. You should speak to your insurer and they will guide you on the paperwork. This shouldn’t be at an additional cost to your policy.
When you put your life insurance policy into trust, the money is cared for by a trustee (normally a relative or a solicitor) until the money is paid to your beneficiaries, who are normally your children and spouse. You can set a date for when you want your beneficiary to receive their money, for example when your child turns 18.
Putting your life policy in trust will ultimately make sure that your family gets to keep the full value of your payout, putting them in the most secure financial position possible.
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