The financial planning journal

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

26 July 2021

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.

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.

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.

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