Although the only person who cannot benefit from the eventual pay-out is the person insured, anyone else can be named as a beneficiary. Provided that the insurance policy has been correctly written, it will not form part of the insured's estate and its proceeds can therefore be distributed to its beneficiaries independently of a will and without needing a grant of probate. This also means it won't be subject to inheritance tax.
For this reason, life insurance is an excellent way to lessen the impact of inheritance tax on your estate. At present when you die, only the first £325,000 of your estate is exempt from tax. In March 2022 Rightmove, the online estate agency, calculated that the average price of a home in the UK had risen about £350,000 for the first time [1]. In that context, the inheritance tax threshold is swallowed up by property, leaving everything else liable to tax at 40%. A generous life insurance policy can make a significant difference to the amount your beneficiaries will have to pay.
However, there are happier things that life insurance can help with. Obviously it plays a major part in buying a property and giving you the freedom that home ownership entails. If you are planning to marry and therefore combine assets, it is an excellent way of making sure your spouse is protected, and the payments you make during your life will continue to benefit them after you're gone.
Marriage is often the prelude to starting a family and raising children is expensive. According to the Child Poverty Action Group, the cost of looking after a child up to the age of 18 in 2020 was £71,611 for two parents and £97,862 for a single parent family [2]. The proceeds of a life insurance policy would give more than a helping hand to a surviving partner and while nothing will compensate for losing you, it will certainly make the life of your spouse and children much easier.
Being able to help with your children's future is an important part of being a parent. Some of us are in the happy position of being able to give plenty of financial help to them during our lifetime. Some people can absorb their student debt, provide the money for a deposit on a flat or a house, and generally support them as they set out on their own path. By no means every parent can afford to do this, but by taking out a life insurance policy, you can provide help after death and you'll have the comfort of knowing that if the worst should happen, your children, whatever their age, will see some benefit from a sad event.
Another consideration related to your passing is the funeral arrangements. There is tremendous peace of mind to be had in knowing that, when you die, your loved ones will not have to assume the burden of paying for the funeral. Compared to other major family milestones, funerals are not the most expensive, but according to British Seniors Funeral Report 2021, the average cost of a funeral is about £5,600. Even a modest policy would cover this.