Families need life funds

If a breadwinner dies, can the dependants manage financially? Andrew Geldard has the solution

If something unexpected and tragic were to happen to you today, do you feel confident that your immediate family would be able to carry on coping financially and afford the same standard of living despite the loss of your income? This may be a morbid thought, but according to government figures nearly 1,000 people's partners die every day in the UK, causing untold financial as well as emotional turmoil.

Financial salvation from the state is not a realistic option. The most a widow with children under the age of 19 can expect is pounds l,000 as a one- off payment, plus a weekly widowed mother's allowance of pounds 62.45 topped up with pounds 9.90 per week for the eldest child and an additional pounds 11.20 per week for each subsequent child.

Families of some employees will be eligible for a lump sum payment through the company's corporate life cover, but a recent survey by Legal & General found that life cover in the workplace extended to only 24 per cent of male respondents and just 4 per cent of women. When men did have individual life cover, the average amount was pounds 22,400, while for women it was only pounds 11,200. The average figure for couples with joint life cover was pounds 52,000.

Peter Timberlake, Legal & General's communications manager for life and healthcare, said: "The problem that often occurs is that people with life assurance neglect to review it at different stages in their life to ensure that the cover reflects the extra responsibilities they take on. As a result, many families are exposing themselves to possible financial difficulties should they lose a breadwinner."

Most home-owners have life cover built into the mortgage repayments to pay it off should they die, which is fine for people with no partners, yet don't be lulled into thinking this alone will be enough to sustain dependants.

Identifying what level and type of life assurance cover to take out - policies can last for either a set number of years (term assurance) or the rest of the policyholder's life (whole-of-life policies) - will depend on the individual's circumstances and it may not be necessary at all for twentysomethings with no major ties. However, it is a type of insurance everyone who is married, particularly with children, seriously needs to consider.

According to Amanda Davidson, of the independent financial advisers Holden Meehan, people with young families should look to have life cover worth at least ten times annual salary. "This will help pay off outstanding debts while providing a degree of income replacement to allow the other partner to pay for childcare if they decide to work."

Term assurance is one of the cheapest and simplest forms of life cover. It pays a lump sum if the policyholder dies within a specified period but will not return any capital if they do not. For a revised premium, the policyholder can increase the sum assured during the term to take account of extra responsibilities, such as an expanding family and school fees. Some policies also pay out the sum assured early on if a terminal illness has been diagnosed.

For a non-smoking man and woman aged 30, buying term assurance of pounds 100,000 for 20 years, the best quotes on the market are from Scottish Widows, with pounds 11.90 a month for a man and pounds 8.60 for the woman.

Couples also have the option to take out a joint life policy which pays out if one of them dies during the specified period. For a 30-year-old couple just starting a family and taking out joint term assurance of pounds 80,000 for 20 years to cover the children's early years, Scottish Widows charges a competitive monthly premium of pounds 14.40, while at Scottish Provident the cost is pounds 14.80 .

Policies also exist to provide a replacement income for the policyholder's family for a set number of years. Called "family income plans", they pay out a fixed amount, such as pounds 15,000 per year, for the remainder of the term if the insured dies.

Whole-of-life policies provide a lump sum whenever the policyholder dies, rather than within a certain period, and are useful for paying off any inheritance tax or in keeping the family business afloat. The monthly premium is subject to review every five or 10 years to check it is sufficient.

People taking out life assurance through the company PEP Direct are offered a substantial cash rebate. For example, the 30-year-old man taking out 20 years of term assurance for pounds 100,000 from Scottish Widows will receive pounds 142 as a rebate.

Life assurance is vital for insuring that early death does not result in long-term financial problems for your family. PEP Direct 0800 413186; Holden Meehan 0171 404 6442; Scottish Widows 0345 678910; Scottish Provident 0131 558 2740