17 November 2018

Death and finances: What if it all goes wrong

5 min read



Losing a loved one can have devastating financial consequences, but life insurance can help you in difficult times

Nobody wants to think about the worst happening, but providing financial protection for yourself and your loved ones if there is a death in the family means there is one less thing to worry about at an exceptionally difficult time.

As well as grief and stress, death can bring unexpected costs. Having the right life insurance policy can help to alleviate this – and the right type of insurance will depend on your own family circumstances. As well as a life insurance policy, those safeguarding against the death of a partner could consider funeral insurance, while there are specific over 50 life insurance plans for those who are thinking about the future for their families later in life.

One big concern is how to replace lost income when a partner dies. If you're in paid work, you might want insurance that pays out a lump sum or a regular monthly income. Family income benefit pays a regular income for a set period, while level term cover pays out a lump sum directly after the event.

When considering whether you might need to replace lost income in these circumstances, don’t think only about paid work. If you look after your children or an elderly relative, you might want insurance so there is money to pay for someone else to take on that role.

If you’ve got a debt, such as a mortgage, that will decrease over time, you can take out a type of cover called decreasing cover, which means that your prospective payout also decreases over time. This can help bring down costs. You can find out more about different types of life insurance.

Together with long-term loss of income, a death in the family can bring specific costs, such as paying for the funeral or inheritance tax – a 40 per cent tax payable on estates worth over a certain threshold, currently £325,000. If you think you might be liable for inheritance tax, it may be worth contacting a financial adviser because there are steps you can take, such as leaving most of the estate to a partner, that can significantly reduce the amount you might pay. Be aware, though, that financial advice comes with a cost.

To find out what cover is right for your family and how much you need, start by looking at your basic monthly outgoings (rent or mortgage, bills, other debt repayments), and consider how much you and your partner contribute to paying these outgoings. That way, you can work out how much each of you would need were the other one to pass away.

You might want to factor in the rising cost of living when you’re deciding on cover limits. It is easy to forget that inflation typically makes most household bills more expensive over time, and you are likely to want a policy that keeps up. For example, a loaf of bread that cost 4p in 1960s’ Britain costs £1.04 today, showing that shopping bills are far higher.

Alternatively, you may want to choose a policy with an “increasing cover option”, so the lump sum paid out increases each year in line with inflation or by a fixed amount, such as three per cent.

When you are thinking about how your family would cope financially in the event of your death, it is worth taking into account other payments, besides a sum from an insurance policy, that would contribute to their financial stability. These may include any life cover you have through your employer and any investments, savings or pensions that would pass to your family when you die. There are also some state benefits that your family may be entitled to if a spouse or partner dies.

Royal London offers a range of life insurance products

Find out more here