Insurance policies change over the years and very often more economical solutions with greater benefits and / or cover can be found. Therefore it is judicious to ask your financial adviser to review your cover on a regular basis.
In this guide we provide helpful information on the different types of protection insurance available.
This is the type of policy typically described as ‘life insurance’; a policy designed to pay out upon death, within an agreed period of time or ‘term’. The cover is level or fixed from start to finish, so it is very clear on how much is paid, within a certain time frame, eg your policy will pay £250,000 should you die within the next 20 years.
Costs & Cover
There are three main considerations that an insurer will take into consideration:
The cost is proportional to the amount of cover provided.
Consider whether you need to cover your partner particularly if they are not working and / or if younger children are involved, as your partner may need to stop working in full or part to care for them. This is often a very important consideration to care for those who would suffer financially if you died, such as partners, children or other family members.
You will need to take into consideration and cover your liabilities or debts to ensure a decent standard of living for your dependants.
It is worth checking with your employer if they provide a ‘death in service’ benefit which provides some cover, thus reducing the amount required under term Assurance.
The length of the cover term.
This is, generally dictated by individual circumstances. Typically a policy which is designed to provide for a partner should take into account their retirement age & likewise one designed for children should extend until they’ve finished their education. The term can be set for any length of time, so you may want to extend it beyond these set times.
Cover is affected by lifestyle
The cost of the cover takes into consideration factors such as occupation, age, health, etc, with higher risk items such as smoking increasing the premium payable.
Policies can be taken out on an individual basis or alternatively joint policies which pay out upon the first death. It should be noted for joint policies that the cover ends upon the first death and payout, so it may be worth considering separate policies. Sometimes it is more economical to purchase separate life policies in any case.
Upon death, your life assurance forms part of your estate. It is straight forward to include an option within the policy where it is written in trust. This ensures the proceeds will go directly to the trustees for payment to your chosen beneficiaries thus avoiding inheritance tax.
Mortgage or Decreasing Life Assurance is to ensure payment of your mortgage upon your death, typically within a certain time frame. It ensures that your dependants will not have to worry about paying the mortgage after your death.
Why take out this policy?
This is an ideal policy to cover your mortgage, arguably one of the largest debts that most people have. This ensures that the debt does not pass onto your estate, or your loved ones, upon your death. The cover ensures peace of mind that your dependants will have one less thing to worry about. It can cover both a repayment and interest only mortgage.
What are the costs?
Typically Decreasing Life Assurance is less expensive than Level Term because the amount of cover is proportional to your mortgage thus will reduce over the years as you pay your mortgage off.
Should I write the policy in trust
When you die your life assurance will form part of your estate which may make the total value of the estate liable for inheritance tax. Writing the policy in trust can often be utilised to avoid this tax as the monies will go directly to the trust for payment to the beneficiaries thus avoiding inheritance tax. It is normally a straight forward option taken out with the policy at no additional premium.
Critical Illness Cover is very similar to Life Insurance, with the clear difference that it pays out upon critical illness rather than death for example, heart attack, cancer or stroke. It is designed to payout in the event of a critical illness which is defined within the policy and in some cases if you need surgery, again subject to the insurers stipulations. Certain illnesses will not be covered or specifically excluded from a policy so it’s worth checking the small print carefully. It can be taken as a regular income (Family Benefit Income) or as a cash lump sum.
Why take out this policy?
Critical Illness Cover is ideal if you do not have other savings or assets to fall back on if the worse would happen, as it can cover major commitments such as a mortgage. It can allow you to pay off your mortgage or even adapt your home to assist with living with an illness. If your savings will cover your liabilities & costs then it may be worth considering covering your income.
What are the costs?
The cost of the policy will be proportional to the risk, so things like your occupation, health and age are taken into consideration. Being a smoker will increase your risk & thus cost of your insurance premium. Many policies have options that can increase or decrease the cost of cover and the length of term will have an effect too.
Certain pre-existing illnesses or illnesses within family history may be excluded from your policy so as ever we recommend checking the wording carefully.
Some policies are flexible allowing you to alter the cover over time. You may wish to increase your cover as you become older or financial circumstances change. A policy typically has a set premium fixed for a certain term, however there are whole of life policies which can also include critical illness insurance too. We will advise on the recommended policy based on your personal circumstances.
Certain policies combine critical illness cover with life insurance and is often a cost effective way of buying both types of cover. However, you run the risk that once a claim is made for a death or critical illness, the cover ends, meaning the other person will be left without cover. If the illness is particularly serious then it may prove difficult to source replacement life insurance.
When considering a combined policy it is worth ensuring it covers your life insurance and critical illness needs in full, and comparing to the cost of separate policies.
Critical illness insurance schemes tend to include cover for ‘total & permanent disability’ to cover you if an illness or injury prevents you from being able to work, often regardless of whether it is specifically written in the policy. If included we recommend checking the wording to establish whether it will cover “any” or “own” occupation, the latter being more expensive as it provides a broader scope of cover. We strongly advise seeking advice on this aspect of your policy.
it is not uncommon to find a degree of overlap between critical illness policies and permanent health / income protection insurance. There are differences between the policies, the most important being that critical illness cover pays out a lump sum as opposed to income protection which pays out a regular income to suit your needs.
The lump sum option tends to be the more popular so that you can pay off debts, although there is nothing to stop you taking out both forms of cover if finances allow.
Whereas life policies and critical illness plans pay out lumps sums, income protection pays out a monthly income should you be diagnosed with an illness that prevents you from working. These plans will provide you with a regular income as long as you are too ill to work but payments will cease once you have recovered.
You will be able to choose the level of cover you require – subject to the provider’s limits – and the range of illnesses covered are frequently wider than those covered by critical illness plans. The cost of the plan will depend on the level of cover and how long you need to be off work before payments start (the ‘deferred period’). If you are happy for the cover to start paying out after 26 or 52 weeks of illness, then the monthly costs can be significantly lower than for shorter periods.
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.