Finance
In this the third feature , Paul Brady DipPFS a partner in St James Place Wealth Management looks at ...
What should I consider when assessing the financial needs of my family when I die ?
As Woody Allen wryly observed : “ I ’ m not afraid of death ; I just don ’ t want to be there when it happens ”. Many people eventually reach a stage in their lives , usually quite late , where they require advice because they have realised the importance of planning ahead for this inevitable event .
Life and health insurance protection is the underpin of most good financial planning . These types of insurance can ensure that , if the worst should happen , the right amount of money will reach the right hands at the right time . Life insurance puts money in the hands of those who need it when a person dies . There are many reasons why this money might be needed , including paying off a mortgage ( or other loan ) if a borrower dies , protecting a family against the early death of a spouse , partner or parent ( particularly important for people with financial responsibility for children ), paying inheritance tax ( IHT ) or protecting a business against the financial consequences of the loss of its owner or a key employee .
The life assurance needed to cover a loan is relatively simple to assess . You need enough insurance for the amount of the loan and the cover should last for the time that the loan is outstanding . If you pay off some of the loan , you should be able to reduce the amount of cover earmarked for this purpose . But most people also need insurance cover to replace their income if they were to die . The same principles apply but the calculations are a little more complicated . For example , you decide you need life assurance cover to provide the school fees for a child who is now five and will probably be in school until she is 18 . You should therefore first quantify the total amount of school fees that you would have to pay over the period and take out cover of this amount for the next 13 years .
The approach to insuring other needs is roughly the same . For example , you could calculate how much your family would need to cover the general household and other expenses and how long they would need the funds .
You can arrange for life cover to pay out a series of annual amounts over a set period , which is a simple approach to replacing an annual income . But most life cover pays out a lump sum . If you want a lump sum to provide £ 1,000 a year for 10 years , you would need life cover of about £ 10,000 ; if the income were needed for 20 years , you may need an amount slightly less than £ 20,000 as the invested sum may produce some growth or income .
It ’ s sometimes hard to work out how much life cover you would require overall for your family , because of the difficulties of assessing your family ’ s needs after one or both parents have died . Current levels of expenditure provide a good starting point for making these estimates , and then you would have to consider the other costs that might be involved , like childcare . It can be especially difficult to assess the potential financial impact of the death of a parent who spends most of their time looking after children and the household . A good starting point is to estimate the costs of buying in these services .
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