How much life cover do you really need?
Life insurance is designed to pay out a lump sum of money in the event that you pass away. This type of insurance policy can really help to protect your family financially during a difficult time. Not only that but setting up your life cover in a trust can help to negate any tax payments.
People take out life insurance for a number of reasons. The most common reason for life insurance is to pay off a mortgage or to cover outstanding debts. Equally, the payout may be used to provide an income to help with everyday bills. In addition to this, many business owners and directors opt to take out a life insurance policy to protect the business. Losing a key member of the team can cause a financial impact, which life cover can help to counteract.
Business life insurance or a personal policy?
When looking at how much life cover you actually need, it is important to determine what the purpose is. A lot of our customers are unsure whether they need a personal policy or a business policy. For some, it may be worth looking into both. Yet, there are options to run a policy through the business and have the payout go to your loved ones.
Relevant life cover
One of the most tax-efficient policies for business directors and employees is a relevant life policy. It provides a lump sum that goes directly to the family but is paid for by the business. As the business pays the premiums it can come with tax benefits. There is no need to pay national insurance, corporation tax or income tax on the policy. Relevant life cover is also written into a trust. Therefore, when a claim is made, no inheritance tax is required to be paid.
How much do you need?
The payout can help your family cover any debts or mortgage payments as well as adjust to life on one income. The money can also be used to pay rising funeral expenses as well as help to sort out the estate.
Calculating relevant life cover very much depends on your income and family expenses. Typically, our customers like to make sure that the mortgage is covered but there may be other debts too. Costs such as childcare and education are often taken into account too. Furthermore, you may wish to leave additional money behind for your children, grandchildren or to go to your favourite charity.
Key man insurance
A key man insurance policy is designed to insure the business against the loss of a vital member of staff. The business may suffer a loss of profits in the event that a key person such as a director, client relationship manager or operations director were to pass away. For example, without a key member, a client may choose to go elsewhere. Additionally, the business may not run as efficiently without an operations director causing delays. Key man life cover is paid for by the business and the payout goes back into the business too. The payout of a key man insurance is normally tax-free.
Key man insurance is still available for business owners who own a significant share of the company. In this case, the tax benefits are often lost but the payout is still tax-free. It may also be possible to use the payout for income that goes to the deceased’s family. Again, this would eradicate any tax benefits, but it can be a viable option for business owners looking to run the policy through the business yet provide a safety net for their family.
How much do you need?
Key man insurance can help to counteract any loss in profits or clients as well as pay off outstanding loans in the deceased’s name. The policy can also be used to cover any recruitment and training required for the position.
Typically, a key man insurance policy is calculated by measuring the individual’s contribution to company profits. This could be based on their sales targets and how much money they bring in. However, it is more difficult to calculate if their role isn’t profit based. Therefore, you may want to consider a multiple of salary or measure the risk to the business. For example, a software developer could have expert knowledge of the business systems. Without their knowledge and input, it may cost the business to find someone to replace them and get the business running again. In addition to this, it may cost the business with inefficiencies or errors during the transition period. If you’re unsure about how much cover to take out, it can be worth speaking to a financial or insurance advisor. They can help you to determine the right amount for you and your business.
Shareholder and partnership protection
For business owners with a significant share in the business, shareholder or partnership protection may be more beneficial. When a business owner passes away, their share of the business will normally fall into their estate. Therefore, it would go to whomever they left the share to in their will. However, if there is no will present, a business share would normally go to a family member.
If that family member did not intend to be a business partner the likelihood is that they will wish to sell the business share. The co-shareholders may not have enough money to buy back the share from the family, which could put it at risk of being sold to competitors.
Therefore, a shareholder or partnership protection policy can be used to provide the funds to the co-shareholders so that they can get back control of the business. It also helps to provide a financial safety net for the family. Often, a cross option agreement or buy-sell agreement is put in place to facilitate this transfer, making it easier for both parties.
How much cover do you need?
When it comes to partnership and shareholder protection, the level of cover will usually reflect the value of the share itself. Therefore, you’d need to be aware of the value of your business along with the percentage each shareholder owns. Often with this type of policy, it is also best to consider inflation rates and get an indexed policy, so that the value of the share remains valid in line with economic changes. As the business grows, it may be worth reviewing your policy so that any changes in value are reflected in your life insurance policy.
The general rule of thumb is 10 times your salary
With life cover, it is recommended to take out 10 times your salary. However, this can be different if you don’t have any children, you’re renting your property. Business life insurance options may be different too.
The main aim for life insurance is to cover debts, mortgages, business loans and help to protect those around you. Whether that’s for business purposes or for your own personal purposes. It’s also important to remember that the cheapest option doesn’t always provide the best level of cover. For people who also have suffered from serious medical conditions or smokers, you’ll be looking at paying more for the same amount of coverage too.
Get advice on your life cover
To help you find the best policy, it may be worth getting advice from an insurance broker or independent financial advisor. They can help to find out not only which type of policy is best for your needs, but also how much cover you may need.