Insurance is NOT just for Grown Ups
At MyBump2Baby, we are proud to work with trusted Financial advisers throughout the UK to help raise awareness around family protection. If you would like to find your nearest financial advisor visit our family protection directory.
Financial Advice should be simple – initially, but inevitably things can become complicated.
Now that Christmas is out of the way and the New Year and New Decade are upon us, it’s likely some of us have resolved to finally getting around to all those things we’ve been putting off but meaning to sort out.
For some it’ll be a visit to the dentist, returning a library book or unwanted Christmas presents, for others it might be to review their finances and get things straightened out at last.
Financial Advice – If not now… when?
When it comes to finances, one especially important area seems to be neglected by young and growing families is that of Family Protection.
What do we mean by family protection? Basically Insurance.
Now, I can see your eyes glaze over at the very mention of insurance….but for relatively small monthly payments we can sleep tight in the knowledge that should you be hit by the proverbial bus, your loved ones and immediate family will not have to make any hard or rushed decisions due to financial pressures.
It’s a strange world
In April 2019 the BBC reported that approximately 4.1 million have insurance policies on their cats and dogs.
The Moneywise website reported in July 2018 that less than one third of adults, 8.1million households in the UK have life insurance. In the same report they state there are 11.1million Mortgaged properties and that the average debt, including mortgage debt, credit cards, car loans and overdrafts was reported as £57,830 per person in the same article.
I find it hard to comprehend that we are more likely to consider insurance for a pet than we are ourselves or our partner.
How would you be able to afford to service or repay an additional £58,000 of debt if your partner died, not to mention the emotional upset you are going through when you got hit with that sudden death. It would be extremely hard if newly widowed but as a parent as well? Why would we leave ourselves and our loved ones so exposed?
Life Insurance
Insurance is something you pay for but never want to claim. Life insurance especially!
If you have a debt, this will remain repayable even if you die. This is true of taxes as well as credit cards or loans. Any outstanding loan will be repaid from your estate on your death.
When you are young free and single, without any relationship commitments you don’t need to be concerned about Life insurance. But when you start making commitments, taking on debt, with or without a partner, things start to get a little trickier.
Jack and Jill, The Resurrection
Let’s assume you have met someone you want to spend the rest of your life with. You’ve been together a while and decide that rather than continuing to rent, you’ll pool your resources and buy a house together.
As a young couple with no children, it makes sense to have a joint life insurance on any outstanding mortgage debt that you have with your partner, just in case the grim reaper strikes one or the other of you.
The amount of life insurance might depend on the type of mortgage that you have, for instance if you have an interest rate only mortgage, your monthly payments are re-paying the interest only, but at the end of the mortgage you will have to repay the principal back to the lender. In this case it makes sense to have a level term life insurance policy in place.
If, however, you have a repayment mortgage, then the amount of capital you owe the lender declines as you make each payment. In this instance you might want to arrange a decreasing term life assurance. This is a cheaper type of life insurance and designed so that the amount paid out on a successful claim matches the amount of the outstanding mortgage.
Let’s reintroduce our young couple from my last article, Jack and Jill. They have a joint interest only mortgage on a house that is on a 25-year term.
In this instance a ‘level term joint life first death’ policy could be put into force which would repay the mortgage principal on the death of either Jack or Jill, ie, the first death.
In practice what this would mean is that should Jack die, Jill is in the situation whereby she isn’t pressured into selling the house because her mortgage has become unaffordable.
The policy will only pay out once, so if both Jack and Jill were to die in a car accident, the mortgage will be repaid, but there will be no further life insurance paid out on the second death under this policy.
Hopefully, Jack and Jill have taken my previous advice and had their Will’s written when they bought their house together. This would ensure that were the worst to occur, their estate is split as they wished to their respective chosen beneficiaries’.
And then there were 3!
With the arrival of a new child, things start to get a little more complicated and expensive!
Jack, Jill and baby Tom.
What’s to be considered? Has the mortgage gotten any bigger? Well, strictly speaking, with a small change to the beneficiaries of the life insurance to recognise the new addition to the family, on the face of it, nothing needs to be changed.
But realistically, with an extra mouth to feed, clothe, pamper it makes sense to consider the effect of the death of one of the parents on the ability of the remaining parent to meet the weekly and monthly expenses.
Let’s assume Jill gave up work to look after Tom when he was born. Therefore, since Tom’s birth the couple have relied on Jack’s salary to pay all the bills.
If Jack was killed in an accident, from Jill’s perspective, the mortgage debt would be covered by the life insurance the couple arranged when they first bought the house, but there are still monthly living expenses that need to be paid.
Alternatively, if Jill was killed in an accident, again the house would be paid for by the life insurance policy, but in order for Jack to continue to work and earn an income, he would have to arrange for carers, babysitters and/or nursey for Tom as well as transport on top of all the normal monthly bills.
So, as you can see it might be prudent to arrange an insurance contract that would pay out monies sufficient to cover monthly living expenses should either of the young parents suffer a critical illness or tragically die on top of the life insurance.
Family Income Benefit – FIB
In my opinion, (nearly) every young family should have it!
A new or young family can arrange a policy that will pay out a set amount each month to cover bills in the case of either or both parents dying until their children are no longer dependent, or in full time education, (whichever is the latter) . It can be arranged to cover a stay at home Mum or Dad as well as an employed person. It can be arranged to cover critical illness as well as death.
Let’s say Jack was taking home £2000 a month, the mortgage was £750, monthly bills another £800 and a further £250 spent on socialising and new baby clubs and bits and bobs. Jack and Jill hope that Tom is going to go to university, so they want to provide financial support until he is through full time education aged 22.
Jack and Jill set up a Family Income Benefit policy, (FIB), on Tom’s first birthday to pay out the sum of £1050 per month (covering the monthly bills and socialising costs), until Tom’s 23rd birthday.
(Because the mortgage debt would be paid off in the event of the first death, we don’t need to worry about paying the mortgage, we only need to insure the funds necessary to meet monthly expenses and socialising requirements.)
The policy will pay out on the first death of either Jack or Jill. If Jack dies it would replace a sufficient amount of Jack’s salary to cover the household bills, if Jill died, the policy pay-out would supplement Jack’s income to cover the cost of arranging babysitting, nursery or carers for Tom. Most importantly it is paid tax free if Jack and Jill paid the premiums themselves.
This FIB policy is like the Decreasing term policy we mentioned above. The policy has a set maximum life until it expires, ie Toms 23rd Birthday.
The insurance company knows the maximum number of payments they will have to make on the policy from the start, so they know the maximum liability they have when writing the policy and that liability declines each month Jack and Jill don’t claim on it. This ‘reducing liability’ means the cost of insurance can be very competitive to other types of life insurance.
From Jill’s point of view imagine the relief that a newly widowed Mum would feel knowing she didn’t have to worry about household bills or where the money was going to come from to raise her child if her husband suddenly died through injury or illness. She’d be under no pressure to make hasty decisions about money or the roof over her head at a time of unimaginable upset. She would have time to make reasoned decisions for the best for her and her child safe in the knowledge that she is able to afford to provide a similar lifestyle for her child as she would with her husband still alive.
Similarly, Jack would know he could continue his career whilst being certain he was able to afford the required care and assistance for his young son. He would have the comfort of knowing the house was paid for and could take the time to make decisions on his and his sons future.
Will Writing -Did I mention updating the will?
I have spoken before about the importance of making sure your will is up to date and this has just moved right up the to-do list with the birth of your first child. Previously, as a singleton, you only had to worry about who it was that you wanted to sort out your financial affairs, but now you and your partner need to agree who you would want to look after and raise your child should you both die and it should be noted in your updated wills.
This might be your parents, an elder brother or sister or close friends, but ultimately you are entrusting them with overseeing the upbringing of your child. It’s a big decision and one you should have a proper discussion about with all concerned parties.
Back to the life insurance and Family Income benefit
Imagine you’ve asked your sister and her husband to act as your new baby’s guardians should anything happen to both of you and they’ve willingly agreed.
Let’s just think about the enormity of what you have asked them to commit to.
You’ve asked them to take on paying for and funding your child’s upbringing, supplying clothes, funding holidays and clubs and all the other attendant expenses.
They might have been perfectly happy in their 2 bedroom house with their only child, but because you and your partner both died, circumstances now mean they might incur considerable expense and effort in having to uproot their own family, move house or upgrade their car just because your orphan is now their responsibility.
However, all is not lost.
Because you had thought things through, were aware of the cost and upheaval you were asking your sister and husband to go through, you made them the beneficiaries of your Family Income Benefit scheme so they could afford to raise your child alongside their own. All monies receivable under the policy until it expires, (23 for Tom in the example above), could go towards their own monthly costs.
In respect to your property, your child is most likely your named beneficiary, so if you both die, it is held in trust (because he/she is a minor). Your executors to your estate and guardians for your young child are listed in your will. Your will might give specific or general instructions as to what age your child inherits and if any reasonable costs are allowable for their guardians in bringing the child up.
Insurance, flexibility to ease adversity
From the above, I hope I have given a flavour of how flexible insurance can be. With a little thought and consideration Life Insurance and FIB should be considered two of the building blocks for the protection of a young family starting out.
There are a lot more factors to consider when thinking about protecting your immediate family, all of which cannot easily be covered in a short article such as this but can be readily discussed with your Financial adviser.
At MyBump2Baby, we are proud to work with trusted Financial advisers throughout the UK to help raise awareness around family protection. If you would like to find your nearest financial advisor visit our family protection directory.
If you would like to speak to your local financial advisor, why not check out our directory?
Carla is the founder of MyBump2Baby. Carla has a huge passion for linking together small businesses and growing families. Carla’s humorous, non-filtered honesty has won the hearts of thousands of parents throughout the UK.
She has previously written for the Metro and made appearances on BBC News, BBC 5 live, LBC etc. Carla is a finalist for Blogger of the Year award with Simply Ladies inc. Carla is also the host of the popular Fifty Shades of Motherhood podcast and The MyBump2Baby Expert podcast.
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