Life insurance is an oft-ignored piece of protection, especially by younger people.
You may see it as a waste of money that you’ll never see a return on, especially when your family could simply use the savings you’ve built up if the worst happened to you.
The argument for prioritising savings is simple: you keep your money, rather than giving it to an insurance company, and you only need to spend it if you absolutely have to.
However, this perspective may be flawed, and it could potentially be dangerous for your family’s security to prioritise your savings over life insurance.
You may be tempted to spend your savings
It’s certainly a good idea to have savings that you’re either keeping aside in case of emergencies, or for a specific, long-term goal such as buying a home. But one issue you might encounter with your savings is that you may be tempted to spend them.
You may think you’re making a harmless purchase with your savings, knowing that you can top up the difference over the next few months. But, if something happens to you in the meantime, you could be leaving your family in the lurch, unable to survive on what’s left.
There’s no risk of doing this when you take out life insurance; your cover lasts as long as you keep paying your premiums.
Your savings are finite
While it may seem obvious, once your savings are gone, they’re gone.
You may feel confident that you won’t spend your savings on anything other than what they’re intended for. You may even keep a dedicated emergency fund separately, so that you’ve got two concurrent savings accounts for different eventualities.
But what if you have two emergencies in one month? What if you’re in the process of rebuilding your savings pot when disaster strikes again? What if you spend your savings on your long-term goal, when you suddenly and unexpectedly pass away?
If your savings accounts run dry and you’re no longer there, you could have inadvertently put your family in a difficult position.
Comparatively, insurance is far safer, offering a long-lasting safety net that will still be there, even if you’ve had to pay out for another emergency.
This puts the monthly cost of life insurance premiums in perspective. It may seem like a series of inconvenient payments to make, but you never know when you might need it.
Life insurance can be used to repay some or all of your mortgage
You should seriously consider life insurance if you have a mortgage, as your family could use it to repay some or all of your outstanding mortgage.
If you’re the main provider for your family, your savings might not be enough to cover your home loan, especially for an extended period.
But, as long as you’re still covered when you die, your family can use a life insurance payout to pay off some or all the mortgage on your home.
This could be the difference between your family being able to stay in your home or having to find somewhere else to live, while also dealing with the emotional trauma of losing you.
Insurance can help you avoid paying Inheritance Tax
Imagine that you’re single or divorced and want to give money to your children or grandchildren to live off in the event that you die unexpectedly.
Keeping a large amount of money in savings isn’t necessarily a bad way to make sure you’re able to posthumously provide for your children, but the money may be subject to Inheritance Tax (IHT).
IHT is charged on any value of your estate above the nil-rate band (NRB) of £325,000, or £500,000 if your children or grandchildren inherit your home. The standard rate of IHT is 40%, which could dramatically reduce how much money you’re able to pass to your children.
Meanwhile, if you have life insurance and die while it’s still active, your children will receive the payout entirely tax-free, provided that your policy is in trust. Essentially, this means you have the peace of mind that your children will receive as much of their inheritance as you intend.
Combining strategies gives you the best of both worlds
In reality, it’s often best to combine saving with life insurance to ensure you and your family will always have enough to live off.
Your savings are vital to achieving long-term financial goals, such as buying a home or building towards your retirement. Savings could be indispensable if you lose your job or are unable to work for any reason and you don’t have any other protection in place. Your emergency pot could tie you over until you’re able to work again.
Equally, your savings won’t last forever, especially if you’re no longer around to top it up. That’s why having life insurance is a crucial safety net that could secure your family’s future in the event that something happens to you.
Overall, you should probably try to prioritise both savings and life insurance as a key part of your protection strategy for you and your family.
Need help with life insurance?
If you’d like to know more about how life insurance could secure your family’s future, or you’d like help finding the right protection options for you, please do contact us.
Email [email protected] or call 0131 339 2281 to speak to one of our experts.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.