New Parent Financial Planning - Life Insurance Trust Questions?

Gorie

I am about to become a new parent and after my excitement settled, I was faced with the cold reality of needing to do financial planning – this is not the favourite job of my wife or I.

 

Top three on the hit-list that we have drawn up are: making a will, powers of attorney (finance and health) and sorting individual life insurance policies (we will also review our income protection).

 

I have a good grasp of wills and powers of attorney but the life insurance in trust thing has me chasing my tail a little.

 

I was therefore hoping, prior to meeting with an IFA / solicitor, that someone might be able to help with the following questions:

 

1.      I want my life insurance to go to my wife obviously as she will pay the mortgage off etc… but then later once the mortgage is lower and we are both older it would make sense for it to go to our yet unborn child/children. From what I can tell the trustees have the power to make these decisions and act according to my letter of wishes?  Is that correct?

2.     Can new trustees be added in the future? I.e. once the current trustees start to age and my child / children are over 18 can they be added?

3.     Can a trustee be a beneficiary? (I.e. can my wife be a trustee and benefit from the policy)?

Thanks,

dunstonh

1.      I want my life insurance to go to my wife obviously as she will pay the mortgage off etc… but then later once the mortgage is lower and we are both older it would make sense for it to go to our yet unborn child/children. From what I can tell the trustees have the power to make these decisions and act according to my letter of wishes?  Is that correct?

You would not put the mortgage life assurance in trust.  You would set it up as joint owner, joint life, first death. No trust required.   

The life assurance you set up for Family protection you could.  Although with joint owner, it's not as important but can be useful if you are talking large amounts where future inheritance tax may be a potential issue.

You wouldnt take out one policy trying to do the lot.    It would be multiple policies or segments.

2.     Can new trustees be added in the future? I.e. once the current trustees start to age and my child / children are over 18 can they be added?

Yes

3.     Can a trustee be a beneficiary? (I.e. can my wife be a trustee and benefit from the policy)?

yes.

Weighty1

1) Yes
2) Yes
3) Yes

Gorie

Thanks for that.

we’ll have two separate fixed term policies - initially this will likely cover the mortgage but it won’t later on once it’s paid off.

Hence the need to place this in trust.

dunstonh

Why are you not getting a policy to cover the mortgage and another (or more) for family protection?

Hence the need to place this in trust.

Not seeing the need for a trust unless you mean separate as in individual (single life, same owner) and not single life of another or joint life, joint owner.

Gorie

We have spent a while discussing this and we want two entirely separate individual term (to age 75) life insurance policies. I didn't find the mortgage protection that much cheaper - plus we plan to move into a much bigger house with larger mortgage in a few years.  Essentially at present I have calculated for life insurance to age 75 its around £6 per month per £100K. 

Furthermore it isn't just the mortgage we would like to cover - its future expenditure such as children's university fees. Having fixed monthly fee, fixed term policies for us works out to be the most cost effective option as we are both fit and well with no past medical history.  If I took separate policies we would have to upgrade mortgage cover in 4-5 years with further medicals etc... We could still change later but I cant see us finding this cover cheaper.

My plan was to put mine in a trust for my wife if I die sooner then later children and vice versa.

dunstonh

.  Essentially at present I have calculated for life insurance to age 75 its around £6 per month per £100K. 

Do you need it to 75?   Most people cease to have a financial need long before that.

If I took separate policies we would have to upgrade mortgage cover in 4-5 years with further medicals etc... 

Modern policies can be multi-segment.   You have segments with different expiry points that end at the different times depending on your different needs.    Family protection needs will usually end before spouse protection needs and mortgage needs end differently again.     

A single catchall policy with extended term is not normally cost effective and will usually end up being unsuitable sooner or later and need replacing again.

Are you needing medicals for this policy?  That is normally only the case on large sum assureds or where there are medical conditions.

Mortgage repayment is a joint need.  So no need to duplicate with single cover.

Weighty1

Gorie said:

Furthermore it isn't just the mortgage we would like to cover - its future expenditure such as children's university fees. Having fixed monthly fee, fixed term policies for us works out to be the most cost effective option as we are both fit and well with no past medical history.  If I took separate policies we would have to upgrade mortgage cover in 4-5 years with further medicals etc... We could still change later but I cant see us finding this cover cheaper.

My plan was to put mine in a trust for my wife if I die sooner then later children and vice versa.

So if you die 3-months after you take the policy out would the cover you are looking at be sufficient to cover the mortgage, provide funds to raise the children as you'd like to and also be sufficient to cover their university funding?

You don't know when they are going to die and if you cover all those needs at day 1, as death may occur then, then this would be a more expensive option than having a multi-benefit plan.

If, for example, you took on a new mortgage in 4-5 years most plans have a Guaranteed Insurability Option which allows you to increase the cover without needing to undergo additional underwriting so if your health has changed there are still options available.

Gorie

Thanks for the above comments. I am interested in multisegment policies now I have explored them a little. This a similar level of cover spread across a few policies comes out more expensive.

Given we are both in late 30s and fine health I went for age 75 rather than 65 as it didn't impact on the premiums too much (I think they increased by 57 pence for the additional 10 years.  Plus we could stop paying the policy age 65 anyway if we no longer required the cover.

For us and our financial situation these policies seem affordable now and health wise we cannot be any better. Given that we are set in our future intentions (i.e. larger house and therefore mortgage) I see no other reason to delay. 

csgohan4

having multiple life assurance policies is fine as they will each have different purposes. I have two myself, one for mortgage and one for life spending. Both put in a separate trusts though.