Overpaying on insurance?
Peter McGahan
Monday 7th October, 2024.
ABOVE my late father in law’s work desk, he had a self-printed note which read: “Procrastination is my greatest sin, maybe someday I will do something about it”.
At the end of a week, or any part of a week for that matter, prioritising life insurance over a walk, glass of wine, or a bit of sport on the TV isn’t that motivating.
Whether it’s decision paralysis, overwhelm, avoidance of negative thoughts, or instant gratification elsewhere, procrastination has its many feeders.
Talking about life insurance must be done at some point and the sooner the better and in reality - as well as miserably - the best time is now.
Life insurance is, of course a pool of risk where we pay into a pot for a set period of time on the grounds it may pay out but hoping that we don’t waste our money. ‘Plan for the worst, and hope for the best’, was always a great strategy. It is of course a bet where the insurance company thinks and hopes you are going to survive and you are thinking there may be a more unhappy option, so it’s not overly exciting.
My motivation for my own life cover was, as a provider to my family, that on top of my children being hopefully very, very miserable that I was gone, that they wouldn’t suffer financial insecurity due to the loss of my income.
I’ve seen a few topical comments in the media on whether people have enough cover, are paying too much, or have too much cover, so I’ll cover it.
Firstly, only use an Independent Financial Adviser. They have a system which accesses all the life insurance providers. On a typical quote system, the sixth provider on the list was 30 per cent more expensive than the top one. Spin that another way, for that company in sixth place providing you £300,000 of cover, the top would provide £390,000. There are many companies still in business who are much further down the quote system. They are in business because people have been buying their expensive products of course.
What’s enough life cover? Firstly, protect all debts. Add that up. Add in things you would want to provide for your children: their education, a deposit for a home, their wedding.
Second is to insure the income. Calculate today how much money you would want your family to have and for how long if you passed away. Remember the mortgage and debts would be gone from the proceeds above. You could calculate that number to coincide timewise so that if you passed away early it was enough just to take the children through to age 23 or so.
Another way is to calculate to keep the capital intact so that the beneficiaries take annual withdrawals of a set amount of say four per cent or five per cent rather than running down the capital. So, if the shortfall was £25,000 per year, the capital payout would need to be £625,000, which at four per cent would provide the £25,000. If you were expecting a five per cent withdrawal from the lump sum, a £500,000 policy would be fine, as five per cent equals the amount you need.
Those wanting to keep the premiums lower would opt for the former calculation (running down capital) or alternatively a family income benefit plan which simply replaces a set income for a set time. Defining the amount and time brings the cost to exactly what is needed, which of course will be cheaper. The former calculations leave flexibility and options, those that life serve us unexpectedly.
Remember, to pay attention to any death in service benefits or pension benefits you have that could also be taken off the target you need. Know also, that your death in service could end if you leave that company.
Ask your independent financial adviser to put the policies into trust so they speedily go to your beneficiaries and don’t enter your estate, which will save inheritance tax but also speed of probate.
And to finish, remember that some people can use their company to pay their life insurance which would then save tax on the premiums.
If you would like to quote for your life insurance, please call 01872 222422 or email info@wwfp.net
Peter McGahan is the Chief Executive Officer of Independent Financial Adviser Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority. For further columns and commentaries, visit www.wwfp.net
