Protection needs are generally overlooked by clients because solutions are often assumed to be expensive or unnecessary. If there is anything that 2020 has taught us, it is to expect the unexpected, and I believe the pandemic has highlighted the importance of having adequate protection policies in place.
As I write (1st March 2021), there have been 114 million confirmed coronavirus cases around the world and sadly 2.53 million deaths, of which over 100,000 have been in the UK alone. Furthermore, the Governor of the Bank of England has suggested that the UK’s unemployment rate may actually be higher than official figures currently show, as the Coronavirus pandemic continues to drive a surge in redundancies. Those that previously relied on company benefits are therefore at risk of not having sufficient protection.
There are a wide range of insurance policies that can be taken out and trying to choose between them and completing all the questionnaires can often be daunting. Everybody’s needs are different, so it is important to understand how the different types of cover work.
There are broadly three types of cover:
This normally provides a predetermined lump sum to the family or estate of the insured person if they pass away during an agreed upon term. The money might be used to pay off large debts, like a mortgage or it could be invested to replace lost income for dependants. This type of insurance is called a “Term Assurance” policy.
Instead of a lump sum, you could consider a policy that would pay a regular monthly income to the family of the insured person, for a fixed term. This policy is called a “Family Income Benefit”. This policy is generally cheaper than those that offer a lump sum because the actual sum assured decreases over time.
Should the insured person live past the agreed term of the “Term Assurance” or “Family Income Benefit” policy, the plan simply stops, and you receive no payment. However, premiums can be surprisingly affordable for most people.
Alternatively, there are “Whole of Life” insurance policies which ensure, no matter when the insured person dies, that their loved ones will receive a lump sum pay out. However, after an initial period the premiums tend to be reviewed periodically and are likely to rise as the insured person gets older. An investment element can be incorporated, so that the policy can build up a value over time. However the downside of this is that, if the investment does not grow as much as you had hoped, you may end up paying more in premiums to cover the shortfall in the investment. Guaranteed premiums are available but as you might expect, you’ll pay more from the outset. ‘Whole of Life’ policies are often used for Inheritance Tax Planning.
Serious illnesses can have a severe impact on your finances as you may need to take time off work for your treatment and recovery. In certain cases, it may be beneficial to pay for private treatment, to speed up the process or receive alternative therapies otherwise unavailable through the NHS.
A Critical Illness insurance is designed to help, by paying out a lump sum payment when the insured is diagnosed with a specified serious illness covered by the policy. The list of illnesses is normally extensive, but the majority of claims that are made are for the following illnesses :
- Certain types and stages of Cancer
- Heart attack
- Early onset Alzheimer’s
- Conditions such as multiple sclerosis
Having a pre-existing condition does not mean that providers will not cover the insured, but will more than likely increase the premium and may have more extensive exclusions than for those people who do not have a history of medical issues.
The spread of coronavirus has resulted in insurers in some sectors adding coronavirus-related exemptions to new policies or otherwise pulling of out of the market completely. It is worth bearing in mind that Critical Illness cover is usually for long-term illnesses.
Critical Illness policies are usually set up for a fixed term and can include life cover at little or no extra cost.
An Income Protection policy, also known as Permanent Health Insurance, is an insurance policy that pays out part of the insured person’s income if they are unable to work as a result of an injury or illness.
The payments start after a period of the insured’s choice (known as the deferred period). If the insured is able to return to work prior to the end of this deferred period, no payment is made. Income protection usually pays until retirement, death, or your return to work. There are also policies that pay out for shorter-terms (e.g. five years) and these will be less expensive.
The term of the contract can usually be to age 70, and there is no limit to the number of claims that can be made while the policy is in force.
You should note that these policies are designed to replace some of the lost income caused by accident or sickness - the level of benefit that you choose can be reduced if there is no loss of income e.g. through state benefits, employer benefits and other insurance policies.
These contracts pay little in the event of death (possibly a return of 12 months premiums), so it meets a different need to, for example, Family Income Benefit. This policy, however, is more expensive than life cover because the probability of a pay-out is significantly higher.
Insurance can offer you peace of mind if you know you are protected against the unexpected. It is vital to get advice when taking out such insurance policies. It is also important to review your protection cover periodically, to check that it is competitive, sufficient and appropriate for your changing circumstances.
Your Financial Planner at Wise Investment can take you through the details of the various policies available and make sure you select the right cover for you and your family.
The above is issued by Wise Investments Limited for educational purposes only. The information contained is not a personal recommendation and should not be construed as financial advice. If you are unsure about the suitability of a particular product you should speak to an authorised financial adviser. Wise Investment is authorised and regulated by the Financial Conduct Authority (FCA 230553).