Why do we forget about life insurance?

Life insurance

It’s a funny thing, insurance.  Most people insure their car, house & contents, holiday, carpets and so on, but what is the most valuable thing in your house?

In these current times of austerity who wants or needs to pay out yet another monthly premium especially on something like insurance we will never spend!  Yet some insurances, like house or car, we buy with no real resistance.

We may shop around on comparison sites and yes, third-party insurance is compulsory, but most of us wouldn’t dream of not having “fully comp”, especially if the car is relatively new.  Most interestingly, it’s taken as read that there’s nothing to come back to you if you don’t claim during the insurance term.

Plan for the worst

So why is it then, that there’s such a huge resistance to life insurance often on the basis that “there’s nothing to come back at the end of the term”?   Many of us seem perfectly willing to accept the huge financial damage that our families would suffer on our death in a way that we wouldn’t in relation to the financial damage that would ensue from the loss or serious damage to our car or home.

Perhaps it’s easier to imagine what we’d do if our car was stolen or our house burnt down.  Maybe people need to think more about what the future would be like financially for loved ones if they’re not there to help.  A lump sum payment can mean the mortgage is paid off at a very difficult time for a surviving spouse, or a young couple with a new baby could avert the terrible financial consequences a sudden death would bring to their  family.

OK… a bit morbid, but if it helps to close the protection gap who could say it wouldn’t be worth thinking about it?  After all it’s better to plan for the worst and hope for the best, that’s why a cruise ship has lifeboats.

Falling into the protection gap

It’s not just individuals and families though who forget about life assurance. It’s estimated that around one million small businesses across the UK are exposing themselves to serious financial risk through the absence of protection insurance.

Let’s take an example of two entrepreneurs running a small but growing media agency.  Like many growing businesses the partnership does not tend to hold much cash, and on discussing matters the two partners admit that should either of them die unexpectedly they wouldn’t know where they’d find the money to buy the other partners’ family out of the company.

What is partnership protection?

Partnership share protection is designed to ensure funds are available to purchase a partner’s shares if one should die. An option may also be given to the deceased’s personal representatives to sell the deceased’s share to the continuing partners on death.

Breathing space

While these two people have a loyal workforce, they are driving forces of their business. If either of the partners died it’s highly likely that this would significantly reduce the businesses turnover and profits.  To protect against this,  each partner should take out a life cover for a sum equal to the value of their share of the partnership plus an additional amount to compensate for the lost profits. If something terrible occurred, the remaining partner would have some financial breathing space while the business stabilised.

Option to buy

Both policies can be written under trust for the benefit of the other partner and a cross-option agreement be affected which stipulates the surviving partner has the option to buy the deceased shares and the personal representatives of the deceased’s estate have the option to sell the shares. Should either side exercise their option the other side must comply.  This agreement also set outs the agreed valuation of the partnership and, as the business is still growing,  this should be regularly reviewed.

Having protection in place takes a huge weight off the partners’ minds, knowing that they and their families (and in effect their loyal employees jobs) are protected should the worst happen, allows them to focus on driving their business forward.

All small businesses need to consider putting protection in place not just partnerships.  A Relevant Life Plan is a tax efficient individual Death in Service benefit, ideal for Directors and other employees of smaller, micro businesses.

Insure your most valuable asset

For many people the premiums for a reasonable level of life assurance wouldn’t necessarily even be that much more than their car insurance premiums, and even if they were, the asset being insured (you) is so much more important than a car!

An independent financial adviser will be able help you plan your protection needs, and have access to the whole market to find you the most suitable cover at the best price.

A version of the above article was first published by unbiased