Life insurance and a spouse’s or partner’s passing are not subjects that are easy to discuss at the breakfast table. But unfortunately, many people put off these discussions only to find they are left financially exposed if the worst happens. The concept of using life insurance to pay off joint debts is not new – people have used it for many years. However, as UK finances are under strain and personal debt is the norm at certain stages of life, considering insurance to protect those you love is a sensible move.
Average household debt in the UK
A recent report by the Money Charity cast an alarming light on household and personal debt across the UK. Here are some of the standout figures from the January 2024 report:-
- Average unsecured debt stood at £4,163 per person
- Average credit card debt per household stood at £2,452
- Average total debt per household stood at £65,795 (including mortgages)
- Average total personal debt stood at £34,737 (including mortgages)
- Average annual interest payments per household stood at £2540
- Average annual interest payments per person were £1341
If we focus on average total personal debt, this stood at £28,528 in the January 2014 survey, but currently stands at £34,734, an increase of £6206 over the last decade. To make matters worse, it is not inconceivable that debts across households in the UK could be held in joint names where there are spouses or civil partners. These arrangements are traditionally covered by what is known as joint and several liability.
What is Joint and Several Liability?
Under UK law, when you take out joint finance with a spouse, partner or other third party, the liability is not split 50/50. Indeed the lender is not concerned about how the repayments are financed as long as they are paid. So legally, each party to the loan is liable for the entire debt. Thereby on the death of one party, the lender would likely pursue the surviving customer for future payments.
There is a common misconception that joint debts are split equally between the parties, with the deceased’s share of the debt only recoverable from their estate. Therefore, if you are the higher earner in your household and have joint debt with your spouse/partner, you should consider life insurance to protect your loved ones. Upon your death, the last thing your family would need is financial pressure, which could sometimes mean losing the family home.
Life Insurance as a Solution for Joint Debts
There are predominantly two types of life insurance policies you can use to repay joint debts upon your death. These are known as:-
- Term life insurance
- Whole life insurance
Term life insurance policies are used to cover a specific period, for example, the term of your mortgage. As you would only pay premiums over the period you wanted protection, the long-term cost is lower than whole life insurance. It is also possible to structure a term life policy in such a way as to reflect the outstanding balance on your mortgage; this is known as decreasing term life insurance. In this scenario, the term life insurance will end when your mortgage is repaid in full.
Whole life insurance offers whole of life protection for the individual so long as premiums are paid on time. In addition, the premiums will not increase, and the death benefit will not decrease, giving spouses and partners a financial safety net. Many people consider whole life insurance at a relatively young age as the premiums tend to be more affordable. While your cover requirements may change as you get older, this type of policy tends to be used to pay off debts and leave a financial nest egg for your loved ones.
Are you one of the 63% with no life insurance cover?
A report in October 2022 by Direct Line Life Insurance cast a fascinating light on life insurance cover across the UK. As a consequence, we know that:-
- 63% of those in the UK do not have a life insurance policy
- 37% have cover despite six in 10 households admitting it would benefit their family
- 35% of those without insurance cover believe policies are too expensive
- 42% of those with no cover admitted to not knowing much about life insurance costs
- 71% of households have a monthly subscription to a form of service (satellite TV, NetFlix and so on), twice as many as those who have life cover
When it comes to reasons for taking out life insurance cover, we know that:-
- 33% did so to cover their funeral and associated costs
- 32% wanted to ensure loved ones were financially secure
- 28% took out life insurance to pay off their mortgage and other debts
Imagine mourning the loss of a loved one and facing the realisation that not only have you been left with debts, but you are now the only income earner in the house.
Appointing beneficiaries
Traditionally, life insurance policies are written in trust to the benefit of the beneficiaries.
The objective here is that, on the policyholder’s death, this payment is not part of their estate and does not count towards any inheritance tax liability. Furthermore, as it is not part of the estate, the payment should be made relatively swiftly, not having to wait for probate to be granted.
It is crucial that insurance policies are reviewed regularly, as many people fail to update the beneficiaries. Unfortunately, there have been instances where funds have been paid to ex-partners in error, leaving current loved ones to struggle.
Conclusion
The Association of British Insurers (ABI) confirmed that the average payout on a life insurance policy in 2021 was more than £80,000. Considering that the average household debt stood at £65,795 in January 2024, this puts everything into a more positive perspective. While death is not a subject which is easily discussed within family circles, investing in life insurance is a positive step towards protecting your family’s future.
If you would like to discuss life insurance and other protection policies, please contact us, and we can review your options in detail.