Surviving the death of a breadwinner

How can you keep your family finances alive? Julian Knight and Chiara Cavaglieri report

These may be modern times, but millions of families are still relying on a sole breadwinner to keep their finances afloat.

Too few, it seems, think about what would happen if the family breadwinner dies, according to a new study from insurer Friends Provident. Twenty-four million people in Britain have no life cover in place. What's more, the study shows that even those who have considered getting cover would underestimate their family's income needs by an average of £14,500 a year.

And even if a loved one has died, there are still financial obligations to be met. "Generally, mortgage and credit card firms are sympathetic but it doesn't happen all the time," says Meg Van Rooyen, a spokeswoman for National Debtline. "There can be a miscommunication or the bereaved may be too upset to say anything. Lenders may even continue writing letters to the deceased and can start debt collection proceedings."

For those thinking about life insurance, determining how much cover to take out can be tricky. The minimum should be enough to clear any outstanding debts and provide a lump sum for your dependants. Calculate the amount you would need to sustain your current standard of living over an average 12-month period, multiplied by 25 years. Even if you already have life cover, it may not be adequate if your situation changes.

You should begin by clarifying what level of protection you already have in place. See if you are entitled to any death-in-service benefits which may be linked to your pension or an insurance scheme set up by your employer. If you die before retirement, your nominated beneficiary could receive up to four times your annual salary as a tax-free lump sum. Unfortunately, employers are making big cutbacks on these kinds of perks. "Clients should still consider putting in place their own cover because if they change jobs, are sacked or are made redundant, then the death-in-service benefits will be lost, and dependent upon the client's health at that time, replacement cover may not be available," says Scott Gallacher from independent financial adviser (IFA) Rowley Turton.

The younger and healthier you are, the cheaper it will be. Smokers planning to kick the habit in time for No Smoking Day on 10 March can also save money after a year of not smoking. Quotes obtained by broker show that a 30-year-old man who smokes could get £150,000 of level term assurance over 25 years, with guaranteed monthly premiums, from Royal Liver for £14.32 per month. As a non-smoker that could drop to just £8.84, saving him £1,644 over the lifetime of the policy.

Premiums can vary widely, with some providers aggressively marketing themselves to particular groups of individuals. Protection broker Cavendish Online does not offer any advice but it will search the market for you and give up its commission in exchange for a one-off fee of £35.

If your circumstance are more complicated – if you have a chronic medical conditions or wish to set up a trust – consider getting help from an IFA or advisory brokers such as Lifesearch and Torquil Clark which offer free telephone advice and quotations. Taking advice will cost more than an execution-only broker but is preferable to taking out an inadequate policy.

"When dealing with more complicated issues and inheritance tax, it could pay to get advice so that the action you are taking is appropriate," says Stephen Smith from IFA Davison Smith. "Using an adviser on a fixed-fee basis ensures that you can obtain the right cover as cheaply as possible."

The cheapest way to protect your dependants is with a term assurance policy which pays out the sum if you die within a set period of time, normally 15, 20 or 25 years. Premiums are significantly more expensive with a whole-of-life policy, which guarantees to pay the sum assured upon your death. Many people use the number of years left on their mortgage as a guideline when determining the length of their term assurance policy, but you can then set the level of cover to remain level throughout the term, decrease over time (often to mirror a repayment mortgage) or increase over time (to protect against inflation).

Family income benefit may be more suitable and is often cheaper than standard life cover. Instead of a lump sum, this pays out a tax-free monthly income from the date of death until the end of the policy term. If you have a plan term of 20 years and the claim is made after 16 years, benefits would be paid for the remaining four years.

Have your policy written into trust so that it does not form part of your estate and be liable for inheritance tax. It will also avoid the need to wait for probate to be granted and the death benefits are payable much sooner.

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