Time flies when you’re having fun

What do the horse meat scandal, HMV’s demise and the birth of Prince George have in common?

Believe it or not, they all happened a decade ago – so just think how much has changed in the last ten years in your own life.

As we get older, the chances of getting ill or even dying get higher, yet our understanding of the cover that protects us and our families often gets overlooked over time.

Lots of factors can make your existing cover not fit for purpose – a change of income, new job, divorce, a new child or even just a change in lifestyle like stopping smoking can all be good reasons to check what cover you have.

I have just replaced my existing cover with a new provider – my previous life cover was decreasing over time and only had a small amount of critical illness cover that wouldn’t have been sufficient to make home adaptations or help with household expenses during recovery if I did actually get ill.

It got me thinking about the most important things you need to know and check about your own cover to ensure it’s working hard for you.

Here are some key points you need to consider today

1) If you are employed, or have recently changed jobs, you should check whether your death-in-service benefit has changed.

It takes a matter of minutes online, or a quick call to HR. But it could make a big difference to your family’s financial well-being – and their IHT bill.

In all the excitement and exhilaration of getting a brand-new job, or a big promotion, it’s easy to overlook your death-in-service benefits. Negotiating your new salary, or flexible working is understandably front of mind. After all, new jobs are all about the future, not the outside possibility that you may die while in employment.

Almost all UK employers include a death-in-service benefit, or a lump sum pension payout, as part of their employee benefits scheme.

A death-in-service benefit means that money is left to your loved ones if you die while on the payroll of that company. Most death-in-service benefits are a multiple of your salary – typically between two and four times your annual gross income – paid to your chosen beneficiary.

2) Have you stopped smoking or become healthier since taking out your policy?

If so, it might be worth checking out new options. Analysis published by mutual insurer Royal London has found quitting smoking could save people up to ￡16,000 in insurance premiums.

Smokers who have kicked the habit could be eligible for lower rate premiums if they have not smoked tobacco or used any nicotine products in the last 12 months.

A smoker aged 50 would pay nearly triple per month what a non-smoker of the same age would have to pay for the same cover – as the risk increases such a lot.

For a 30-year-old non-smoker, to get ￡150,000 for their family in the event of death over the next 25 years, is likely to cost just around ￡7.17 per month.

3)???? Are your bills dependent on your ability to work?

Income protection insurance pays a regular monthly amount if you can’t work because you’re unwell or have suffered an injury that results in a loss of earnings. Knowing that if you suddenly couldn’t work, the mortgage and bills would still be paid, could allow you to make plans with greater peace of mind.

It’s worth recognising that, without income protection insurance, a sudden loss of your wages could have far-reaching effects on your financial future, disrupting your savings.

As income protection will cover around 60% of your monthly wage if you can’t work, it will help to cover your outgoings. This means you can keep more of your savings and investments intact, leaving them the potential to continue to accrue interest and returns, so your financial goals stay within reach.

Aviva, one of the UK’s largest income-protection providers, paid out ￡51.2 million in income protection claims in 2021, helping 4,300 customers and their families – and 21% of claims related to a mental-health condition, the second most common reason.

4)???? If you have a successful claim, will it be subject to Inheritance Tax?

If the money is paid as a significant cash lump sum to your next of kin, it will inflate their estate, potentially adding significantly to their own IHT bill. Currently, IHT is charged at a rate of 40% on the portion of the estate over a ￡325,000 threshold, or up to ￡500,000 if it includes a family home worth at least ￡175,000 that is being passed on to direct lineal descendants.

It’s often sensible to consider pension or protection payments the same way as a lump sum inheritance. And fortunately, there is a way to protect the financial wellbeing of your family, by using a Legacy Preservation Trust (LPT), as a perfectly legal tax shelter.

This trust can be set up now, and your pension or protection payments can be directed there on death. Tax-free access remains available, but what is left in the trust sits outside the estate for inheritance tax.

As with all trusts, taking expert financial advice is key to peace of mind. Knowing why you’re setting up a trust is as important as choosing your trustees. So it’s worth discussing with your financial adviser how you want your money to benefit your loved ones. For many families, an LPT might be there to provide income or cover school fees. Or it may mean you can clear a mortgage early or set children up in business or properties.

5)???? Is it difficult to set up a trust?

Trusts can sound daunting, but they shouldn’t be. Setting up a trust, like making your Will – is something many people shy away from. Even if a trust is going to make good sense from a financial planning and tax efficiency perspective, it often sits on the back burner. People are concerned that trusts are complicated and time-consuming to set up, but if you’re clear about why you’re doing it, and who you want your trustees to be, it’s quite straightforward. It doesn’t involve reams of paperwork or a large number of trustees.

Your trustees will base their decisions on the instructions you leave behind. So, it’s important that you leave a letter of wishes, which you keep updated, for trustees to refer to. Talk to a financial adviser before you make any decisions to make sure you’re clear, and to set your mind at rest.

6)???? Will the right people get the money? Time to check the small print!

Whenever you change jobs, pensions or protection cover, please do check that you’ve completed the Nomination of Benefit or Expression of Wish form and that the details are up to date. This says who you wish to receive the payment in the event of your death.

However, if you’ve been with a company for a number of years, the people you nominated as beneficiaries, back when you started, may not be the people who are now a priority to provide for. Just like our professional lives, our personal lives don’t always move in a straight line.

If, for example, you’ve remarried, or your circumstances have changed, you may want to change your nominated beneficiaries or allocate the funds differently.

Do get in touch if you’d like to find out more about trusts, or later life legacy planning.

The Legacy Preservation Trust is an advised SJP product, available through a St. James’s Place Partner.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

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