What is the purpose of this calculation? By providing a baseline figure, the study offers a starting point for better financial planning.
It brings home in real terms how a family could be affected, so that families can then assess their budgets in a more informed way. Advisers can paint a more accurate picture of what it means not to have sound planning in place, including a life insurance policy.
Choosing the right policy
While each family’s individual circumstances are likely to vary, the ALFI model provides a good illustration of just how serious the financial impact of a premature death can be for the average family. Yet, we know that not enough adults have life insurance to support dependents should the worst happen.
Moreover, those who would be most exposed should a premature death occur often have the lowest policy costs. Young adults who may just be starting a family are likely to have lower savings and a greater amount to pay on their mortgage.
They may not realise how affordable cover can be – a 30-year-old non-smoker can get £200,000 of decreasing term cover over a 20-year period for around £6 a month.
The Financial Conduct Authority’s consumer duty initiative may also help to improve confidence in the life insurance industry – especially in regard to perceptions of the reliability of claims – and in turn encourage more people to take up cover.
The standard, which came into force in July 2023, sets higher standards of consumer protection in financial services.
Customers can expect a number of changes, including more helpful and accessible customer support, making it as easy to sort out a problem, switch or cancel a product as it was to make the initial purchase.
At present, confidence in the insurance industry is low, with just a fifth of customers saying they trust insurers to act in their best interests.
However, as companies adapt to comply with consumer duty it will help to create a more open and honest place for consumers.
In turn, this should improve the confidence and trust of consumers in the industry. For instance, important information will no longer be buried in lengthy terms and conditions but must be shared in a timely and clear manner when making a purchase.
Family income benefit can also be a valuable option for those in this situation. This enables regular financial support in the event of a terminal illness or death, paying an ongoing monthly income rather than a single lump sum.
For example, if a policyholder were to die five years into a 20-year policy, a monthly sum would be paid out by a provider for the remaining 15 years.
