Baby steps in life insurance

Baby steps in life insurance

The old guard in financial services always said that policy sales were based on fear or greed, so the best way to get someone to buy insurance was to appeal to those raw emotions.

So where do you find the fear or greed in life insurance? Why would anyone want life insurance? Greed cannot apply as the insured would not be around to spend the sum assured, so logically fear must be the key.

A typical advice scenario would be a young couple with a small child living in their own home with some consumer debt and servicing a large mortgage. So long as nothing major goes wrong, all will be well in time, but what happens if one partner dies?

The survivor must provide more childcare, as their partner is not around; there is much less money coming into the household, so the bills cannot be met in full and it becomes just a matter of time before the mortgage is foreclosed, the house sold and the survivor and child homeless. Even if there was enough money to service the mortgage, the mortgage provider would be entitled to ask for the mortgage to be repaid on the death of one of the mortgagees, so unless the survivor could qualify for a mortgage on their own, a forced sale at a stressful time may still be on the cards.

The old guard would then say that buying life insurance was an “act of love”, as it was to protect your “loved ones” when the “worst happens”.

Now, imagine the same scenario if the mortgage was covered by life insurance and enough additional cash to pay off the other household debts, and fill in a bit of the income lost. The survivor still must deal with the hammer blow of a partner’s death, but staying in the home is a realistic possibility and the “worst” has been avoided.

Insurance of any sort works best when the consequences of an event are huge, but the actual possibility of that event really occurring are quite small, so the premium paid by any individual becomes very small, but the benefit received when the “worst happens” is comparatively great.

Death in a modern society is rare, but the consequences to a family group are immense – losing your home is a clear and present danger, as mortgage providers are publicly sympathetic but profit driven, the welfare state is slow and of limited effectiveness and any other support network has its own problems.

Assuming you have now grasped the usefulness of life cover, it is now time to look at how much to buy and what terms to look out for. Going back to the opinions of the “old guard in financial services”, “everyone needs a quarter of a million cover” is not unheard of but does not address the root of any advice problem, how much and why?

To get to how much, an adviser should do a thought experiment defining the impact of a death to the client; asking the client to fill in the gaps

  1. How much do you owe on the mortgage? How many years to go? Is it interest-only or repayment?

  2. How much do you owe in personal loans, car loans, credit cards, store cards and any other debt that fall to the survivor, if there was a death?

  3. How much would the family income be reduced after a death?

  4. How many years until the children are independent? Are there any special factors to take into account, (like illness, disability, private education, extended higher education like medicine or architecture).

Once you have the answers, answers 1 and 2 will give you the amount and duration for life cover paying out a lump sum, either level term insurance or a mortgage protection policy, (reducing term insurance) and answers 3 and 4 would suggest the basic amount and term for a Family Income Benefit plan, paying out a regular sum each month, to cover an income shortfall.

As the cost of cover is defined by the total pay-out required and the period of cover, tailoring both accurately to the needs of the client will reduce the cost of the cover overall. Buying too much insurance is pointless, death is a remote event, so it is highly likely that a claim will never be made and the premium paid will just be an old, sunk, expense. Conversely; not having any cover and needing to make a claim would be absolutely devastating.

If you would like to know more about how we can help you plan and realise your financial goals then contact us at or call us on 01223 792 196.

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.