When you think about financial planning, you probably focus on immediate concerns like savings, investments or pensions. However, life assurance plays an equally critical role, often overlooked until it’s too late. If you’re serious about protecting your family’s financial future, then life assurance is something that should be firmly on your radar.
This article will help you understand why life assurance is an important aspect of your financial strategy and what you need to consider when incorporating it into your plans.
What is life assurance?
Life assurance is a policy that pays out a lump sum to your beneficiaries in the event of your death. Unlike term life insurance, which only covers a specific period, life assurance provides ongoing protection, as long as premiums are paid. It’s a safety net that can ensure your loved ones are taken care of, helping them manage their financial commitments such as mortgage repayments, living costs and education expenses in your absence.
Many people mistakenly assume that life assurance is only necessary for the elderly or those with significant wealth. However, anyone with financial dependants – including young families and homeowners – should consider the impact of losing an income due to an untimely death.
Protecting your family’s financial future
One of the primary reasons to consider life assurance is the peace of mind it offers. The death of a family member is traumatic enough without the added burden of financial uncertainty. Life assurance can provide a degree of financial stability during an emotionally challenging time, giving your family the security to continue their lives without drastic changes to their living standards.
Take mortgage payments, for example. The average UK mortgage in 2024 stands at £234,000, according to figures from the Office for National Statistics (ONS). Without life assurance, your family may struggle to keep up with repayments, possibly risking the loss of the family home. With a life assurance policy in place, the lump sum payout can cover the mortgage or other debts, relieving some of that financial pressure.
Tailoring life assurance to your needs
Every individual’s financial situation is different, so it’s important that life assurance is tailored to your specific needs. You might have a young family, a business to protect or a large mortgage. The level of cover you need will depend on various factors, including your income, lifestyle and the financial responsibilities you wish to protect.
It’s worth discussing your options with a financial adviser who can help assess your situation and guide you towards the right type of policy. Some policies may offer added benefits such as critical illness cover, which could also provide a payout if you’re diagnosed with a serious illness. Combining these types of cover can be a cost-effective way to ensure you and your family are protected in multiple scenarios.
How much cover do you need?
Determining how much life assurance you need can seem daunting, but it’s largely a matter of calculating your financial obligations. Start by considering the following.
- Outstanding mortgage balance: As mentioned, the average mortgage in the UK is significant and paying this off will likely be a priority for your family.
- Living expenses: Consider how much your family will need to maintain their standard of living. This includes everything from utility bills and groceries to clothing and school fees.
- Education costs: Private school fees or university costs can be a significant financial burden. For example, the average annual private school fee in the UK is around £15,000, according to the Independent Schools Council.
A general rule of thumb is to aim for a policy that covers at least 10 times your annual income. However, this can vary depending on your individual circumstances, so personalised advice is always recommended.
Tax benefits of life assurance
An often-overlooked benefit of life assurance is its favourable tax treatment. In many cases, life assurance payouts are free from income and capital gains tax, and, when written in trust, they may also be excluded from inheritance tax. For example, in the 2024/25 tax year, the inheritance tax threshold remains at £325,000. Anything above this may be taxed at 40%. By placing your life assurance policy in trust, you can help ensure that the payout goes directly to your beneficiaries without adding to the value of your estate, potentially reducing or eliminating the inheritance tax liability.
It’s important to review your estate planning strategy to make sure you’re taking full advantage of the available tax reliefs and allowances, particularly when it comes to life assurance.
Planning for business owners
If you own a business, life assurance can play a critical role in your succession planning. In the event of your death, a life assurance policy could provide the necessary funds to buy out your share of the business, ensuring continuity for your partners and avoiding the need for the company to be sold or closed down.
This is particularly important for small businesses, where the loss of a key individual could have a significant financial impact. A well-structured life assurance policy can offer financial protection and ensure the business continues to run smoothly without added financial strain.
Reviewing your policy regularly
As with any financial product, it’s important to review your life assurance policy on a regular basis. Major life events, such as marriage, the birth of a child or buying a home, will affect the level of cover you need. A policy that suited you five years ago may no longer provide the right level of protection today. Regular reviews will ensure your policy continues to meet your needs and offers sufficient protection for your family.
Wrapping up
Life assurance isn’t just an optional extra in financial planning – it’s a vital part of protecting your family’s future. By understanding your options and seeking expert advice, you can ensure you’re taking the right steps to provide long-term financial security for your loved ones.
Whether you’re a parent, homeowner or business owner, life assurance offers peace of mind, knowing that those who depend on you will be taken care of financially. Make sure life assurance is a key component of your financial plan to provide the safety net your family needs.
Are you considering life assurance in your financial planning? Bulley Davey can help answer all of your questions. Contact us today.
Note: This is a non-investment pure protection product that has no surrender value. Talk to a financial planner before cancelling or replacing any existing insurance plan