Life insurance is designed to ensure that your dependants do not suffer financially in the event of your death, and as such, many policies are set up to cover the main breadwinner in a family.
As this person makes the most significant financial contribution to the running of the household, this approach might appear to make sense.
But the consequences of the other partner’s death – even if they don’t earn as much, or have no income because they look after the children full-time – can also be serious from a financial point of view.
This is why you should consider taking out life insurance that covers either partner’s potential death. Your insurance company may ask for further details or for a family medical history, before the policy is supplied.
Much more than in the past, many families today have two breadwinners – often, the loss of either income would create huge financial problems. In situations such as these, the case for insuring both partners’ lives is easy to make. But that doesn’t mean that a stay-at-home father or mother should not be insured in the same way.
After all, their work – in bringing up children and looking after the home, for example – has considerable value, even if they are not paid directly for it. If the worst happened and a stay-at-home parent died, their partner would face a significant extra financial burden. Either they would have to work less in order to devote more time to their family, or they would have to pay for extra domestic help. It is clear that in circumstances such as these, it is important for both partners to have life insurance.
Your cover options
When it comes to insuring two people, there are two options. Each person can take out their own life insurance policy onlice, or a couple can take out a joint-life policy.
Let’s have a look at the differences.
The extent of cover: With two separate policies, the insurance will pay out when either policyholder dies (provided any term that the insurance is in force for has not elapsed). With a joint-life policy, on the other hand, there is usually a payout on the first death only. After this, the other policyholder will no longer be covered.
This could create further problems in the future: if the surviving partner needs to find new life insurance later in life, it is likely to be significantly more expensive. And if they have suffered any health or medical problems since the original cover was set up, this will increase the premiums further.
Price: Because two separate policies offer a greater amount of cover, they are normally more expensive than a joint-life policy. But the difference can be very small, and it is worth comparing prices for both options.
If there is not much in it, you may feel happier with the extra protection that separate policies can offer. If you are buying term insurance, which only lasts for a fixed number of years, the price difference is likely to be smaller. With whole-of-life cover, on the other hand, where the two separate policies are sure to pay out at some point, you can expect there to be a larger price differential.
Flexibility: Taking out two separate policies allows you to insure each life for different amounts, if that is appropriate. The main earner in your family, for example, may be insured for a greater sum than a stay-at-home parent. And problems could arise if a couple with a joint
life insurance policy decide to separate: an insurer would be unlikely or unable to split the cover, which would leave either party needing to arrange their own insurance again from scratch. This could prove expensive if, as explained above, a lot of time has passed (premiums for life insurance are higher the older you are) or if you have suffered any health problems since the original cover was arranged.
Reducing your family’s tax bill
When you set up a life insurance policy it is also worth thinking about how to make sure your dependants can get hold of any payout with the lowest possible tax charge if the worst does happen. Writing your life insurance policy in trust means the cover is ring-fenced outside the rest of your assets, such as savings, investments and property.
This means that payments from the policy are not included in your estate for inheritance tax purposes. At the moment, inheritance tax is charged at 40 per cent on any bequeathed assets above the £325,000 threshold.
Recent rule changes mean that the surviving spouse or civil partner can receive any unused portion of their late partner’s £325,000 allowance. But depending on the value of any property or investments you have, up to 40 per cent of a life insurance payment could end up in the taxman’s hands if the policy is not written in trust.
A joint-life policy can be written in trust so the payout goes to the surviving spouse or to any children in the event of both parents’ deaths. A trust is normally simple and cheap (or even free) to set up: talk to your insurer when you take out your policy, but bear in mind that a trust is not appropriate in all circumstances.