Reliant on your income? How to make sure it never stops…

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A significant number of our clients have one, particularly high, earner in the family. The majority believe that because they have ‘death in service’ insurance through their workplace, not much financial disruption would occur if something happened to them. The reality is somewhat different…

Why a workplace death in service insurance may not be enough

Yes, death in service, or life insurance, might pay out a lump sum to cover the mortgage but what about everything else? What about continuing to pay for the school fees; household bills; holidays; the car and general spending money?

In addition, when a family is particularly young, it’s fairly common that one of the couple has had to step back entirely from work for some time. So, if their partner were to die, replacing all their income immediately could be an almost impossible task. Even if your death in service is enough to pay down the mortgage, it still presents a massive potential protection gap.

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Defined benefit pension schemes and annuities 

I also regularly come across couples that are about to or have recently retired. Usually, one of the couple is one of the lucky few with a substantial level of guaranteed income from an old defined benefit pension scheme or annuity. Now, these schemes can be fantastic, however, in exchange for this guaranteed income, you typically lose out on flexible death benefits.

The unpleasant truth with these setups is that you and the pension provider are both gambling on how long you may live. If the individual was to die earlier than expected, and their partner was reliant on that existing level of income for their retirement plans, it could cause some considerable problems. The scheme may continue to pay income out, in full, for a very short period but it more commonly reduces by 50% and often just stops entirely.

Family income benefit

If you’re one of the aforementioned individuals, what can you do to make sure it doesn’t go horribly wrong?

Well, family income benefit is a fantastic option and can be a great addition to term cover. It’s essentially an insurance policy that will pay out guaranteed income if the person insured were to die. Implemented properly and it can mean that you’d see very little financial disruption if your high earning spouse were to pass away. It will ensure that their regular income is directly replaced by the policy payments. That money that arrives in your account every month to pay the school fees; bills; subscriptions; holidays; and car will just keep on coming. And, as a ‘brucy bonus’, most policies will make sure the income increases with inflation, to reflect any pay rises your partner may have received.

You can obtain cover for terms of anywhere between three and seventy years in length, and some providers will maintain the policy right up until someone’s ninetieth birthday. The best thing of all is that it’s one of the most affordable types of insurance out there, so generally, it’s a great option if it’s right for your personal circumstance.

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Protecting your most important asset

In conversation with Jack Munday and Jordan Gillies

Jack Munday
Jordan Gillies

So, if you have a high earner in your family or are going to be reliant on some guaranteed income in retirement, make sure you protect it. If you don’t, and something awful happened, all your financial objectives could be knocked off course. So, do check out family income benefit and take some advice.

Do you need cover to protect against illness or death?

Our advisers can give you the peace of mind that you and your family are protected against the financial consequences of the unexpected. Get in touch to discuss how we can help you.

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Editorial policy

All authors have considerable industry expertise and specific knowledge on any given topic. All pieces are reviewed by an additional qualified financial specialist to ensure objectivity and accuracy to the best of our ability. All reviewer’s qualifications are from leading industry bodies. Where possible we use primary sources to support our work. These can include white papers, government sources and data, original reports and interviews or articles from other industry experts. We also reference research from other reputable financial planning and investment management firms where appropriate.

Saltus Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority. Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested. Tax rules may change and the value of tax reliefs depends on your individual circumstances.

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