Life Assurance & Income Protection

The cost of insurance, particularly life insurance has fallen over recent years, whilst the quality of cover has in many cases increased. With this in mind, it makes sense to periodically review your cover with the help of a professional financial adviser. We have also put together a handy guide to protection insurances that you can view here. This section provides helpful information on the different types of protection product available.

Level Term Assurance

This is the kind of cover that many people think of when they imagine life insurance- it is cover that will pay out should the worst happen within a set period of time (the ‘term’) The ‘level’ part of this cover comes from the fact that the cover amount is fixed from the start of the term until the end. In short, level term assurance is designed to pay a known lump sum upon death within a fixed time e.g. £150,000 if you die within the next 18 years.

How Much Cover Do I Need and What Will it Cost?

The cover and ensuing cost depends on three things.

  • The higher the cover the more it costs. The amount of cover should ideally take into account any outstanding debts and allow your dependants to maintain a reasonable standard of living. You should also check whether your employer provides a “death in service” benefit as this may provide a certain amount of cover already and may therefore reduce the overall amount required. Cover may also be needed for a non-working spouse or partner, especially when children are young, as if the spouse or partner died, the main earner may need to stop working. Level term is important protection for those who have children or a spouse or partner who would suffer financial loss if you died.
  • How long should cover last? This depends on individual circumstances, but generally a policy intended to provide for children should usually last until they finish full time education, or for a partner until the earner reaches pensionable age. Don’t feel obliged to cover a round number of years as these policies can be for any number of years.
  • Your lifestyle can make the cost of cover cheaper. The monthly premium payable for cover is likely to increase with the likelihood of death within the term – age, health, being a smoker and having a risky occupation can all increase the price, though do not prevent cover being obtained.

Couples can choose either separate policies or joint policies which pay out on the first death. However usually a joint policy would only be suitable if you needed the policy to pay out on the first person to die, as the cover would end at that point. It is always worth getting quotes for standalone policies as these may work out cheaper anyway.

If you die the life assurance payment will form part of your estate, which increases the value of your estate. If the policy is written in trust, the proceeds goes direct to the trustees for payment to your chosen beneficiaries, avoiding inheritance tax. This is relatively easy to do as most insurance policies include the option (and papers) for writing in trust directly, at no extra charge.

Mortgage / Decreasing Life Assurance

This type of insurance is designed to pay off the remaining balance on your mortgage if you die within a set period. It helps to ensure that your dependants needn’t worry about repaying the mortgage if you die.

Is it worth having?

In short, yes. It is sensible to consider cover when you take out a mortgage as this usually becomes a person’s largest debt and monthly commitment- a debt and commitment that would pass to your loved ones should you die. It can be useful protection for both repayment and interest only mortgages and can help alleviate the financial pressure of those people who are financially dependent on you.

How Much Does It Cost?

This type of cover is usually cheaper than a level term policy as the amount of cover will reduce over the policies term in line with your reducing mortgage balance.

Consider writing in trust

If you die the life assurance payment will then form part of your estate. This may make the value of your estate liable to Inheritance Tax. In many cases you can avoid this by writing the policy in trust – which means the payment goes direct to the trustees for payment to your chosen beneficiaries, avoiding inheritance tax. This is relatively easy to do as with most insurance policies they include the option (and papers) for writing in trust directly, at no extra charge.

Critical Illness Cover

Critical illness cover works in a similar way to life insurance, with one big difference – you don’t have to die to benefit from the Critical Illness insurance policy. This type of cover is designed to pay out as either a lump sum or as a regular income (this is known as ‘Family Income Benefit’) in the event of you suffering from a critical illness (from a pre-defined list provided by the insurer) or if you have to undergo certain types of surgery. It is important to remember that if you contract an illness which is not covered by your policy you will not receive a pay-out. These policies differ in what they cover, so you should always check the policy wording.

Unless you have substantial savings, some form of Critical Illness insurance is likely to be beneficial, particularly if you have any debts, such as a mortgage. How much cover you should have depends on your circumstances and you should consider the sums that you might need in the event of becoming critically ill – being able to pay off the mortgage or making modifications to your home, for example. If you’re able to cover the necessary costs incurred from your own or your partner’s savings, then it may be more appropriate to look at covering your income instead.

The size of your insurance premium will depend on your age, health, occupation, whether or not you smoke, the type and amount of cover you need, and how long you need it for. It is important to remember that premiums could also be more expensive if you have a history of a particular illness in your family or the illness may be excluded from the cover.

Flexibility

You may pay a set premium, for instance with a term assurance policy, meaning both your cover and your premium will be set for a certain period of time, however there are whole of life policies that can include critical illness cover which offer more flexibility such as the option to increase your cover over time. Which one we recommend will obviously depend on your personal circumstances.

Combined critical illness and life insurance policies

Some policies will offer critical illness combined with life insurance. These policies can be a cost effective way to cover against both eventualities but they do carry their own risks- they are designed to pay out on the first of either a critical illness or a death claim, meaning that if the policy pays out for a critical illness then there will be no life cover remaining. Furthermore, if the illness has been a serious one then it may be that replacement life insurance cannot be obtained due to health reasons.

If you do decide on one of these “bundled policies” make sure it covers both your critical illness and life insurance needs. Even though it may prove slightly more expensive, it may be worth considering separate policies for these different types of cover.

Total and permanent disability cover

Many Critical Illness insurance policies will also include cover for ‘total and permanent disability’. This is designed to pay out if you become unable to work due to permanent disability arising from any illness or injury (regardless of whether it is listed in the policy). If such cover is included, it is important to establish whether the policy will cover “any occupation” or “own occupation”. Generally, cover is more expensive if the plan is written on an “own occupation” rather than “any occupation” basis as this provides a greater scope of cover. Please ask for advice on this important aspect of these policies.

There can sometimes be some overlap between critical illness cover and ‘permanent health’ or ‘income protection’ insurance however there are key differences, the most significant of which is that Critical Illness insurance pays a lump sum whereas income protection pays a regular income to meet your income needs. In these circumstances people often prefer the lump sum so they have the flexibility to perhaps pay off debts. However, if finances allow there is nothing to prevent you having both forms of cover, which can be very beneficial.

These types of plan will have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse.

Critical illness plans may not cover all definitions of a critical illness. For definitions of illnesses covered please refer to the Key Features and Policy Documents.

Inheritance Tax Planning and Trusts are not regulated by the Financial Conduct Authority (FCA).

The Financial Conduct Authority does not regulate Trusts.

Payment Protection Insurance is optional. There are other providers of Payment Protection Insurance and other products designed to protect you against loss of income. For impartial information about insurance, please visit the website at www.moneymadeclear.org.uk.

This article is intended to provide a general appreciation of the topic and it is not advice.

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