Brits choose the ‘wrong kind’ of financial protection

Nearly a quarter of consumers with life insurance say they would prefer to leave their family with a regular monthly income than a lump sum on death, but currently only a fraction actually choose this option according to new research.

Whilst the majority (59 per cent) of life insurance policyholders surveyed in the study by price comparison website moneysupermarket.com, say they would prefer to leave their family a single lump sum, 24 per cent said they would prefer to leave their loved ones with a regular replacement income. And moneysupermarket.com believes many more would choose this option rather than leaving a lump sum for their dependents to invest if they had the options clearly explained to them. Nearly a fifth (17 per cent) of policyholders said they didn’t know which option they preferred, suggesting they have given the choice little or no thought let alone discussed it with their family.

Emma Walker, protection manager at price comparison website moneysupermarket.com, said: “Faced with the clear choice, our research suggests millions more people would prefer to have cover which pays their family a regular monthly income, and for these people family income benefit could be ideal. However, it’s clear that people aren’t aware that this option could be open to them, since the proportion of the population who actually opt for family income benefit is typically around two per cent.

“People may automatically opt for a lump sum to be paid out on thinking their loved ones will receive more this way compared with a regular monthly or annual income. But they should bear in mind that premiums are higher for lump-sum life insurance, and potentially you could receive more income from a family income benefit policy.”

For example, a non-smoking 35-year-old man assuring himself for £100,000 on a 25-year term would pay £9.95 a month with Legal and General. But for the same £9.95 premium, he could have an Aegon Scottish Equitable family income benefit policy with the same 25-year term which would pay his dependents £6,572 a year. This could potentially pay out more than £160,000 if the unthinkable happened in the early stages of the policy. The family income benefit policy would still hold the same worth to the claimant as the Legal and General policy at year 15.

Emma Walker continued: “Family Income Benefit is paid out tax-free to dependents, whereas being forced to invest a lump sum up-front for income could well trigger significant tax payments. It is important that consumers understand exactly what they are buying and I recommend reading the small print and comparing as many policies as possible for both value and cover provided.

“People should view income protection, critical illness, life insurance and PMI as a basket of goods, and choose which are most relevant for them. The option to take advice is important in choosing the most appropriate financial protection.”