Life is full of ups and downs, but perhaps one of the most emotionally difficult challenges a family can face is losing a loved one.

Sadly, difficult times like this can also present financial challenges – MoneyAge reports the death of a family’s primary earner could set them back £190,000 over 10 years.

Understandably, you may be worried about what might happen to your family’s finances should you pass away, but you could ease these anxieties by considering protection.

For instance, life insurance could provide a tax-free lump sum payment to your family if you pass away. This could give them financial security and help them cover costs like mortgage repayments, school fees, and tax bills – a hugely comforting thought.

Despite the reassurance life insurance could offer, Which? reports that less than half of people in their 40s have sufficient cover.

So, keep reading to discover three helpful ways life insurance could provide you and your family with peace of mind.

1. Statistics prove that claimants are very likely to receive a life insurance payout

One common misconception you may have heard from friends and family is that “insurers don’t pay out”. However, recent data shows that this simply isn’t true.

The Association of British Insurers (ABI) reports that 96.9% of life insurance claims were paid out in 2022. It’s reassuring to know that the vast majority of families receive the financial support they expect from their loved one’s life insurance policy.

So, it could pay to ignore the rumours and consider life insurance. With the right protection in place, you can sleep soundly knowing your family will almost certainly be financially protected should you pass away.

2. Life insurance placed in trust could help your loved ones pay an Inheritance Tax bill

With the Inheritance Tax (IHT) nil-rate band frozen at £325,000 and the residence nil-rate band fixed at £175,000, families are facing increasingly large IHT bills.

Indeed, MoneyWeek reports that the average IHT bill may have risen to a whopping £243,000 for the 2023/24 tax year.

Much of your wealth may be tied up in property or other non-liquid assets. This means that if you were to die, your family wouldn’t necessarily have the cash to foot a hefty IHT bill.

Sadly, if your loved ones find themselves in this situation, they may have to sell sentimental items or even your family home to raise the required funds – a potentially heartbreaking prospect.

Fortunately, with the proper foresight, you could protect your family from this kind of painful situation.

With life assurance that matches your expected IHT bill, your entire IHT liability could be covered by the payout. While life insurance normally covers you for a specific term, life assurance covers you until you pass away, shielding your family from IHT in the ideal scenario that you live a long and healthy life.

However, without proper planning, there is a potential pitfall here. Your life assurance payout might be considered part of your estate and be taxed at the 40% (2024/25) IHT rate. This might leave your family short of funds.

To avoid this, you could hold your life assurance policy in a trust. The subsequent payout should then fall outside of your estate for IHT purposes, or at least reduce the rate of IHT your family pays.

You can hold life assurance policies in both bare and discretionary trusts, but the tax treatment may vary significantly between the two. To ensure your family isn’t faced with an unexpected tax bill should you pass away, it could be a good idea to speak to a financial planner.

A financial planner can help you correctly set up your life assurance policy and a corresponding trust, giving you the peace of mind that you could pass on as much of your estate as possible to your loved ones.

3. Your family could continue to live as normal without additional financial stress

You probably have a long-term vision of how you’d like your family’s future to look. Your ideal lifestyle could include sending your children to a certain school or retiring early.

As a financial planner, my mission is to help you achieve these life goals. And with the right life insurance, you could realise these goals for your family, even in the tragic event that you’re no longer there to share it with them.

A life insurance payout could help your family cover costs like school fees and mortgage payments so they can live the life you’ve always envisioned for them.

Money from the life insurance payout could also be used to cover essential living costs like utility bills and transport while your family adjusts.

With this financial safety net in place, you can relax knowing your family will be provided for if you were to pass away.

Get in touch to learn more about protecting your wealth from unexpected events

If you’d like to know more about how life insurance could give you greater peace of mind, email me at a.douglass@grosvenorconsultancy.co.uk or call my office on 01793 766 123.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.