20 Dec 2019
How can you protect your family?
These days, we can all be guilty of focussing too much on what the future holds. However, sometimes the fairly awkward conversation of protection takes a backseat over investment returns and tax planning. Here we cover off the areas in which you should be considering to protect your family from a variety of risks.
Do you have a valid Will?
A legal Will is the most important document you can have for protecting the interests of your family. Without a valid Will the rules of intestacy - www.gov.uk/inherits-someone-dies- without-will are applied to your estate after you die regardless of your intentions for your family. Dying without a Will could result in an undesirable outcome in terms of inheritance, an unexpected Inheritance Tax bill, and perhaps worst of all, the forced sale of a family asset such as your main residence. Another key point is that you can nominate a legal guardian for your children (usually a family member) within your Will, and can also control at what age and at what rate you would like your children to receive an inheritance.
Legal Will is the most important document you can have for protecting the interests of your family
The Emergency Fund
The general industry-wide consensus is that this fund should cover your family’s expenditure requirements for 6-9 months (net of tax). This timeframe could relate to the standard deferred period for income protection policies (more on this topic below), but the reality is that this figure will be personal to each family and due consideration should be given to your family’s specific risks. There is no reason to hold this fund in anything other than instant access deposit accounts for quick and penalty-free access.
Emergency funds are needed to provide against financial difficulties caused by a number of events, such as redundancy, illness or short-term capital costs relating to your main residence.
Do you need Income Protection Insurance? (IP or PHI)
Income protection insurance (sometimes known as permanent health insurance - PHI) is a long-term insurance policy designed to help you if you are unable to work because you become ill or injured. The aim is to ensure that you continue to receive a regular income until you retire or are able to return to work. This is particularly relevant if your family has a single source of income for which you rely on because:
- It replaces part of your income - if you are unable to work because you become ill or disabled
- It pays out until you can start working again - or until you retire, die or the end of the policy term - whichever is sooner
- There is often a waiting/deferred period before the payments start - you generally set payments to start after your sick pay ends, or after any other insurance stops covering you. The longer you wait, the lower the monthly premiums
- It covers most illnesses that leave you unable to work - either in the short or long term (depending on the type of policy and its definition of incapacity)
- You can claim as many times as you need to - while the policy lasts
- Maximum cover is usually based on between 50%-60% of gross salary (to an upper limit of £150,000)
Life Insurance (TA)
Most employed individuals have a form of insurance provided to them in the form of Death in Service (see overleaf). However, this may not be sufficient to cover long- term debt, such as mortgages, or the capitalised future earnings of ‘the main earner’. There are a variety of lower cost options such as Family Income Benefit (provides an annualised sum up to a predetermined date) and Decreasing Term Assurance (for capital repayment mortgages), to level cover which typically has higher costs as the insured amount remains the same throughout the term.
Trust Planning on Life Assurance
Under normal circumstances, the pay-out from a life insurance policy will form part of your legal estate, and may therefore be subject to Inheritance Tax. By writing a life insurance policy in trust, the proceeds from the policy can be paid directly to the beneficiaries rather than to your legal estate, and will therefore not be taken into account when Inheritance Tax is calculated.
Writing a policy in trust also means payment to your beneficiaries will probably be faster, as the money will not go through probate.
Critical Illness Cover (CIC)
This long-term insurance policy covers serious illnesses listed within a policy. If you are diagnosed with one of these illnesses, a Critical Illness policy will pay out a tax-free, one-off payment (or regular one in the case of Family Income Benefit). This can help pay for your mortgage, rent, debts, or alterations to your home, such as wheelchair access, should you need it. This type of cover is typically more expensive than Life Insurance (rough estimate of 10x), due to the increased likelihood of a non-fatal Illness occurring prior to retirement, than a death. Examples of critical illnesses that might be covered include:
- Heart attack
- Certain types and stages of cancer
- Conditions, such as multiple sclerosis
Check for benefits provided by your employer
Before undertaking a review of your family’s own position, it is essential that you check what benefits are offered by your employer, or if you are a business owner, what policies you could establish through your business.
Death in Service (DIS)
A form of group cover usually provided at no cost to you as the employee and will usually be a multiple of basic salary (i.e. 4x £100,000 = £400,000).
Relevant Life Policy (RLP)
Similar to a DIS scheme, but for smaller businesses with a small number of employees, even one employee. There are tax advantages for business owners arranging cover through the business, rather than out of their own net income.
Some large firms provide this not only for their employees, but also for a spouse, and sometimes children.
Most employees are entitled to £94.25 a week (as at September 2019) after their first four days off sick. It is called Statutory Sick Pay, and covers them up to 28 weeks. Employers sometimes offer more sick pay than this (often called Occupational Sick Pay - OSP), or offer employees cover for a longer period. It is worth finding out how much you are entitled to, and how long for, because this will indicate a potential need for Income Protection.
Group Income Protection
Like an individual policy, but the benefit is paid to the employer and then passed on to the employee through the PAYE system, net of tax. Therefore maximum percentage cover can be higher (75% of gross salary).
Private Medical Insurance
Private health insurance is an insurance policy which covers the cost of private healthcare. It works in a similar way to any other insurance – you or your employer pay monthly or annual premiums, and your provider pays out for some or all of the cost of the private medical treatment you receive.
You can take out a single policy for yourself, or a joint policy to cover you and your partner. This can make things easier as you will only have one provider, one policy, and one point of contact to deal with.