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Don’t cost your family a fortune

Financial mistakes that could cost your family dear

From not having enough protection to leaving yourself open to a large tax bill, don’t cost your family a fortune.

Financial mistakes that could cost your family dear

Financial mistakes that could cost your family dear

Millions of people with children are risking their family’s future by not having enough financial protection. At the same time, those who do have plans in place haven’t made simple arrangements to protect their families from potential tax bills.

Let’s take a look at both of these threats and what you can do about them.

Protection lacking

New research by Scottish Widows found that only a quarter of parents with children under 16 have any form of financial protection. This is down from 31% in 2013 and is the latest sign of a worrying trend where families could be left vulnerable if a parent was to die or lose their job.

Over half of the people surveyed said their income would last for just a couple of months if they lost their main source of income.

In another survey by Sainsbury’s Bank, nearly two-thirds of people who had bought a bigger home said they hadn’t reviewed their life insurance. Yet it’s vital that you do this to make sure any claim would cover the bigger mortgage as well as providing for the family’s future.

Get a free, no-obligation life insurance quote

Cheaper than you think

Over a third of people said they thought they wouldn’t be able to afford more life insurance. However, it’s a common misconception that life insurance is expensive, particularly if you don’t smoke.

For example, £200,000 of life insurance for a 35-year-old non-smoking man over a 20-year decreasing term (which means the size of the payout decreases over time) would cost just £7.88 a month from LV=.

You may already have some life and/or critical illness insurance via your job so the cost could be even lower.

You can choose a life insurance policy where the payout stays the same for the length of the policy (known as level term), it decreases over time as you pay off your mortgage (known as decreasing term and cheaper than level term) or one that pays out on your death, even if you live to a ripe old age (this is called whole of life).

If you do have a life insurance policy or you’re thinking of getting one, you might want to read the next section too.

Get a free, no-obligation life insurance quote

Making sure your money goes to those who need it

If you or your partner die with a current life insurance policy, the payout from that policy could take the value of your estate (the total of all the assets you own, including property, savings, etc.) over the inheritance tax threshold. This is currently £325,000. Anything about that rate will be taxed at a rate of 40%.

According to research by NFU Mutual the taxman received up to £216 million from life insurance policies in the tax year 2011/12 alone.

But if you write your life insurance policy ‘in trust’ then it’s not counted as part of your estate, thereby potentially keeping it below the tax threshold. Or it could be used to pay off an inheritance tax bill.

The trust is managed by a trustee until either it pays out, on your death, or the policy ends. Another advantage is that it will generally pay out quickly on death, as the trustee will only require a death certificate.

Obviously if your estate isn’t likely to go over the threshold or you’re using a life insurance policy to potentially pay off a mortgage, there’s no point putting it into a trust.

But if you’re not then it’s definitely worth thinking about, particularly as it’s free. Talk to your insurer about your options or get independent financial advice. Just be aware that once it’s in trust it will almost certainly have to say there.

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