Surviving the death of a breadwinner
How can you keep your family finances alive? Julian Knight and Chiara Cavaglieri report
Sunday 07 March 2010
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 Lifesearch.co.uk 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.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Shock poll shows voters believe Ukip is to the left of the Tories
Nigel Farage's approval rating hits record low as popularity suffers in wake of Ukip sex scandal
Ukip candidate jokes about 'shooting peasants' in racist and homophobic rant
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
Germany sees 'visible rise' in support for far-right extremism in response to perceived 'Islamisation' of the West
iJobs Money & Business
£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...
£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...
£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...
£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens