Alternatives to Life Insurance
Posted 8th September 2021 by Keely Marsango
Last updated on July 7th, 2023 at 05:09 pm
How would your family financially cope if you were to pass away? At Protect Line, we ask this question to almost everyone we speak to. The responses are almost always the same… “they’d struggle”. Luckily, there are several ways to mitigate this potential struggle.
Life insurance pays out a significant sum of money to your loved ones if you were to die unexpectedly. There are generally no restrictions on how the pay-out is spent, but commonly it’s used to pay for funeral costs, clear an outstanding mortgage, and support day-to-day living costs. The price of insurance can be extremely affordable, with some people getting £300,000 of cover from just £10 a month*.
However, life insurance may not be the right solution for some people, or even an option. Here are four examples of alternative financial support you could rely on to help your family, if you were to pass away:
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Funeral Plans
When a loved one dies, one of the first things to take care of is the funeral. A basic funeral now costs an average of £3,953[A], but this can increase significantly depending on the desired extras. The high costs involved, often with little notice, can cause a financial burden to those left behind, who may have to borrow the money in order to pay for everything.
A prepaid funeral plan** is designed to cover most or all of the costs associated with a cremation or burial, ensuring your loved ones have one less thing to worry about when you’re gone. You can pay for a plan as a lump sum or with monthly instalments, and prices are protected from inflation.
Death In Service
Death in service is an optional tax-free*** work benefit provided by some employers, usually as a way to attract and retain staff. It means that if you were to die during your employment, your nominated beneficiaries could receive a cash lump sum.
This type of life insurance policy is fantastic for those who don’t have, cannot afford or have been denied standard life insurance, because cover is not subject to application. A death in service payout is usually two to four times your annual salary, so you’ll want to work out whether that’s enough for your loved ones to rely on if you were to die unexpectedly.
Private Pension
A pension is money you have saved, within a scheme, throughout your working life to fund your retirement. Depending on the type of pension you have and when you die, your loved ones may benefit from it.
– Defined Contribution Pension
The most common type of pension for employed people in the United Kingdom is a defined-contribution pension scheme. These are private pensions where both you and your employer contribute a percentage of your monthly earnings into a ‘pension pot’, which is designed to be accessed for retirement purposes. The payout you receive from a defined contribution pension is based on how much has been paid into it.
If you die before the age of 75, the money in your pension pot can be passed on to your beneficiaries tax-free. If you are older than 75 when you pass away, your beneficiaries may have to pay income tax when they withdraw cash from the pension.
Therefore, if you have accumulated a substantial pension pot, this money could provide significant financial support to your family should you die without having spent the money in retirement.
– Defined Benefit Pension
If you have a defined benefit pension, which pays a set income in retirement, this unfortunately cannot be passed on, except in certain cases when there may be a provision for a spouse. If you’re unsure, carefully check the associated paperwork.
Savings & Investment
Rather than paying a set amount to a life insurance company each month, you could pay the same amount into a savings account. Whilst this can quickly build up, the interest rates offered by UK banks and building societies are typically below the rate of inflation, meaning your money is losing its purchasing power.
You could consider investing your money each month, as opposed to using standard savings accounts. For example, the FTSE100 total returns have averaged 7.75% each year over the past 35 years, meaning for every £1,000 you invested, you could have made an average of £77.50 annually [B]. With significant amounts invested, it is possible to build up a pot large enough to replace a lost income. However, past stock market performance is not an indicator of future results, and you could lose some or all of your money.
The biggest issue with saving or investing, rather than buying a life insurance policy, is that you may not have accrued enough money for your family’s needs at the time of your death. Life insurance will pay out the full cover amount, whether you’ve paid one month’s premium, or one hundred months of premiums.
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Alternative To Life Insurance
| Advantages | Disadvantages | |
| Life Insurance | Pays out a potentially large tax-free sum to your family upon terminal illness or death during the policy term. No spending restrictions for your loved ones. | Regular premium payments are required. You must not miss a payment during the policy term or risk losing your coverage. Plans may have no cash-in value. |
| Funeral Plans | Pays your funeral costs so that your family is not burdened with finding the required money, often at very short notice. | Only covers pre-determined funeral costs. It doesn’t leave money for your family to support their futures. |
| Death In Service | Pays out a multiple of your annual salary upon your death to your desired beneficiaries. | You must be employed by a company that offers this benefit at the time of your death. |
| Private Pension | If you die before the age of 75, the money in your pension pot may be passed on to your beneficiaries. | Only applicable with certain pension types. The payout is dependent on how much is in the pension pot at the time of death. |
| Savings & Investment | A significant investment portfolio has the potential to replace a lost income. You may be able to access the money any time before you die. | Investments can lose value at any time and may not perform well enough to support cost of living. |
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*Life insurance starting from £10 a month for £300,000 of cover for 20 years for a 30-year-old non-smoker, based on perfect health.
The monthly premium will be based on the sum you are looking to be covered for, the length of the policy, and whether or not you need any add-ons such as critical illness cover. This will also be dependent on your age, weight and height, medical history and lifestyle factors.
[A] SunLife (2023), Cost of Dying Report, https://www.sunlife.co.uk/siteassets/documents/cost-of-dying/cost-of-dying-report.pdf/
** Death in service plans pays out free of income tax and capital gains tax, but will form part of your estate and therefore may be subject to inheritance tax.
[B] ig.com/uk/trading-strategies/what-are-the-average-returns-of-the-ftse-100–200529
The value of investments can go down as well as up, so you could get back less than your initial investment.
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