Life Insurance cover and trusts

Life insurance is key for those with dependents if you understand what type of insurance you want, the next steps are up setting up your life insurance and deciding how much cover you need and whether you want to put it in a trust or not.

How much should get covered for?

The payout amount

Work out the amount that your dependents will need over their lifetime if you died prematurely. There are numerous ways to calculate this, one easy measure is to multiple your salary by 10. Your partner's salary will impact this and how reliant they are on you, but do not forget their time may be as precious as a salary and this needs to be factored in.

The number of years you are covered‍

Insurance cover will last over a certain number of years and may decrease as the years go on depending on the type of cover you purchased. The more years the cover is the higher the premium, this is because as you age the likelihood of dying increases and you have not had to declare any illnesses that may have arisen since you took out the policy. 

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Premium cost affordability

Insurance can be very important if your salary is relied upon by others, but you should also not over stretch yourself by committing more than you can afford each month. 

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Review yearly

The cover you need may change as your circumstances do, as your mortgage increases or decreases, as your kids go to school or university. Once a year check that the insurance you have is still appropriate for your family’s needs. 

Is it worth putting it in a trust?

When looking at your life insurance, see if there are options to put the money in ‘trust’, so that your beneficiaries do not pay tax on the amount if your estate is over the £325,000 inheritance tax limit. This is not important if you are leaving the insurance payout to your married partner as there is no inheritance tax for married beneficiaries. 

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The other benefit is you can receive this money before probate is granted. On average probate takes 9-12 months, which may be difficult if that money is relied on. 

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Finally it gives you the choice of who the money goes to outside of your wishes in your will, and therefore it can not be used to pay off outstanding debts. 

Things to consider when buying

• Read reviews of suppliers and evaluate which ones are good at paying out in a timely manner.
• Read the small print, some policies will be much stricter than others of what they cover (not all causes of death will be covered).
• Revisit that cover is still at the appropriate amount.
• Never be tempted to lie on your application e.g. you never smoked when in fact you did 10
• Check with independent reviews like Defaqto to check the comprehensiveness of the cover.