Ten Reasons to Take Out Life Insurance

by | Jul 9, 2024

Life insurance can help avoid problems for spouses, families, and businesses.

There are many reasons to take out life insurance. Many are overlooked. We look at a few ways that life insurance can protect families, businesses and inheritance.

1. The breadwinner

The death of a married breadwinner with children could cause severe hardship for the surviving family members. Surely, all breadwinners in this situation should arrange that sufficient funds are in place, in the event of death, for the wellbeing of the family. 

2. Mortgages and debts

Banks and building societies used to insist on borrowers taking out life insurance to cover loans. In recent years, this was often not a condition of the loan. However, whilst related to the first point, no one would want to leave the surviving members of the family with debts at a particularly stressful time. 

3. Keyperson

Many small-to-medium-sized businesses often rely heavily on one or two key employees. Consider what would happen if one of them wanted to leave the business, there would undoubtably be a notice period and a few months to arrange a replacement.

Unfortunately, the Grim Reaper often does not give notice periods and the loss of a key person overnight could cause big financial problems for a business. The key person is an asset and is probably the only asset in the business that is not insured. 

4. Shareholder protection

The shareholding of a business has value, but there may not be a ready market for these shares, in the case of a small company. Upon the death of a shareholder, it is likely that the surviving family members would want the share of the equity paid out to them.

One way to ensure that the shareholder’s family are protected and funds are available to buy those shares is to arrange a shareholder agreement (there are various forms) with each shareholder being insured to the value of the equity held within the business. 

5. Business loan protection

Banks may lend money to a business, by securing guarantees on the assets of the business. However, again related to keyperson insurance, the death of a keyperson could give rise to the bank calling in the loan and the guarantees, with disastrous consequences for the business. 

6. Inheritance Tax (IHT) planning for UK domiciles

For UK domiciled individuals, in most cases, IHT will not be payable until the death of the second spouse. While there are a number of IHT tax planning exercises that can be undertaken to reduce the IHT liability, sometimes the only thing that can be done is to mitigate the effects of IHT and arrange funds to pay it. 

This can be arranged effectively with a joint life 2nd death life policy, written into trust. The funds will be immediately available upon the second death, without probate delay, to pay HMRC and leave the rest of the estate intact. 

7. Nil Rate Band gift - UK domiciles

Gifting to future generations is a popular way of estate reduction for UK domiciles. The smaller the estate, the lower the IHT liability in the future. However, gifts up to the nil rate band (NRB) of 325,000 GBP are still deemed to be in the estate for IHT calculation for seven years.

For someone that gifts up to the NRB, there is a potential IHT liability of 130,000 GBP. A simple 7 year level term life insurance policy, written into trust, to cover this liability will ensure the full value of the gift is maintained. 

8. Taper relief on gifts above the NRB-UK domiciles

For gifts above the NRB, taper relief rules apply. This is where the liability to IHT starts to reduce after 3 years and disappears after 7 years. 

A suitable decreasing term policy, in trust, will cover the reducing IHT liability over that seven years. Care must be taken to ensure the HMRC rules about Potentially Exempt Transfers are understood. 

9. Replace death benefits without losing guarantees on pension

Many thousands of people, with deferred occupational pension benefits, will have had up to 4 times their salary as Death In Service Benefits while they were employed. Once employees move on, the cover stops but it often not replaced. 

For those with deferred pensions in Defined Benefit schemes (Final Salary) the pension payable upon the death of a deferred member to the spouse/dependents is usually very low. 

People might choose to transfer these pensions so that the Cash Equivalent Transfer Value and future growth, is available to the family. 

However, for a large percent of these cases, moving benefits from a final salary scheme is going to mean a reduced income in retirement and additional risks and costs.

In the majority of cases, it would be far more cost effective to maintain the final salary scheme benefits and purchase a simple life policy. Thus ensuring the shorter term needs of the family are catered for as well as the longer term needs at retirement. 

10. Spouse insurance

What would the breadwinner do with the children if the housewife/husband died? Consider a young family and the cost of employing someone, almost full time, to look after the children. The cost may be greater than available from net income each month. This would leave the surviving breadwinner with a difficult problem to solve. 

Insuring the non-working spouse is something that is often overlooked, but it is extremely important. 

The views expressed in this article are not to be construed as personal advice. Therefore, you should contact a qualified, and ideally, regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. Consequently, if you do not, then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Importantly, where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.

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Post written by:

Chris Lean

In the UK he worked with accountants as an independent financial adviser, qualified as a Chartered Financial Planner and became an examiner for the Chartered Insurance Institute. He also qualified as a European Financial Planner and specializes in investment and pension advice to clients.

Aisa International is the only financial advice service company specialising in advice for expats that is regulated as a Securities Trader in the Czech Republic, USA, and UK.