Background
The first step is to establish why you need cover.
Will your family need full financial support after you die? Do you wish to arrange for your mortgage to be paid off, or your children’s university education be paid for? Perhaps you wish to ensure your business partner can survive the upheaval caused by your death.
Reasons for arranging cover could include: Mortgage Repayments Level term policies, recommended for interest-only mortgages, offer fixed premiums over a fixed period of time and payment upon claim. Lower premiums are available with a decreasing term policy, where the amount of cover reduces over the term of the policy in line with the amount owing on a repayment mortgage. Replacing the Primary Earner’s Salary Ensuring the family does not fall upon hard times in the event of the primary breadwinner’s death is often the main reason for arranging life assurance. The amount of the payout should be calculated according to the earner’s net salary, the number of years it will be needed to maintain the family, as well as additional expenses incurred due to the breadwinner’s death, such as childcare.The amount can be paid in a lump sum and invested in order to pay out the income needed, or paid in monthly instalments as a Family Income Benefit.
In some cases, policyholders may be concerned about leaving debts behind; in others, they may simply wish their family to be able to keep up a certain standard of living after their death. Replacing Childcare The death of the primary childcare provider may create expenses in the form of full time childcare. The level of care needed and for what term depends on the age of the children. Education Expenses Cover can be arranged for school fees and/or university tuition and expenses for children in the event of the death of the primary earner. How Much Cover? It is common practice to use your current annual salary as a base guide from which to establish how much total cover you wish your policy to provide. A general rule is to choose a policy providing at least ten times your salary; in certain circumstances, up to 25 times salary may be appropriate. We would normally calculate how much cover you need based on target income minus the benefits you already have in place. What Do You Have Already? If you’re a member of the NHS Pension Scheme, and depending on how long you’ve been in it, you’ll qualify for:- 2 X basic salary as a death in service payment
- spouse’s pension (varies on length of service)
- dependants pension(s)
You should also take into account:
- current assets
- savings and investments
- pension funds (personal pensions and AVCs)
- any inheritances
Action Point
Once you’ve worked out any shortfall in cover you’re ready to find the right type of policy. It’s often the case that more than one type of policy will provide you with the best solution. One thing to remember is that any potential benefits from the NHS will increase over time the longer you are in the scheme, so you should review the level of protection you have/need every few years.
Note: Dentists that are planning to move towards private practice will lose a percentage of the benefits (or all) offered by the NHS. If you were relying on this cover you should work out your protection requirements as a priority and apply for the right amount and type of cover as soon as possible.
In a few days we’ll look at choosing the right type of life assurance plan.
