A Guide to Protection for You and Your Family
No-one can be sure what life has in store for us, that’s why it’s important to have in place plans that would provide financially for you and your family should the unexpected occur. However, putting off the decision to take out cover could jeopardise your family’s financial future should the worst happen.
Most of us are aware that there are policies available that provide life insurance, protect us in the event of a critical illness, pay out if we had an accident and were unable to work, and can protect our home and possessions. However, with so many different types of policy available in the market place it can be hard to know which one is right for your circumstances and offers the best value for money.
Life Insurance and Life Assurance
The terms life insurance and life assurance are often interchangeable and both often known simply as ‘life cover’. People often ask what the difference is, so here’s how it works:
Life insurance is cover you take out for a set number of years. You agree the term of the policy at the outset, usually between 10 and 25 years. That’s why you’ll often find this type of policy referred to as term insurance. Most people tailor their policy to ensure that their financial commitments would be met in the event of their death, so policies are often aligned with the term of a mortgage or other loan. Banks and building societies usually require some form of life insurance as a condition of granting a mortgage. Families often opt for life insurance to cover them whilst the children are growing up, taking a policy that will end when they become financially independent. With life insurance, you aren’t guaranteed to receive a payout as you could outlive the term of the policy. However, what you do get is the continuing peace of mind and the guarantees that protection policies give you and your family.
Life assurance, by contrast, is designed to provide cover until you pass away. It can be more expensive than life insurance as it covers you for a longer term and pays a lump sum in the event of death, whenever that occurs.* You may have heard the phrase ‘whole life’ or ‘whole of life’ used in relation to this type of policy.
*Subject to premiums being maintained
Technically the terms are different but in most cases the terms are used indistinct of each other.
Other types of cover
When people think about protection insurance, they typically think about a traditional life policy that can protect for a specified number of years or for a whole lifetime, and pays out a lump sum on the death of the policyholder. But nowadays there are many other types of policy that can also have a major part to play in protecting and providing for the financial needs of you and your family.
Mortgage Payment Protection – These policies are designed to cover the cost of your mortgage payments if you’re sick, have an accident or become unemployed and can’t work.
How it works – Generally, the policy will start paying out either 31 or 60 days after you are unable to work. Most policies will payout for a maximum of one year.
What you need to know – With statutory sick pay set at just £94.25 (applicable from April 2019) and only payable for up to 28 weeks, many families would struggle to meet their mortgage payments if disaster were to strike. The amount payable under the policy is usually around £1,500 to £2,000. So, if you have a large mortgage, you will need to consider how you would cover any shortfall. You can choose the date at which the policy would pay out in the event of a claim. This can range from a month to up to a year. Policies that pay out sooner will have higher
Income Protection – This type of policy pays a monthly income tax-free if you are unable to work due to an illness or injury.
How it works – The monthly income under the policy will be between 50 and 70 per cent of your salary and will be paid until you are fit enough to return to work or reach retirement age.
What you need to know – State benefits aren’t generous and only a few employers will continue to support their staff through a long illness, so income protection policies can help families through difficult financial times. You can choose the date at which the policy would pay out in the event of a claim. This can range from a month to up to a year. Policies that pay out sooner will have higher premiums.*
Critical Illness – This cover pays out a tax-free lump sum if you are diagnosed with a major illness, including cancer and heart disease. Actual illnesses covered in a policy may vary between providers.
How it works – Many insurers will make a part payment on an early-stage diagnosis of a condition specified in the policy; the percentage will vary from company to company.
What you need to know – Many people buy a combined life and critical illness policy, and it makes sense to do so. In this case, a payment would be made on either diagnosis of a critical illness as defined in the policy, or death, whichever is the sooner. If the cover is combined in this way, the policy premium is usually cheaper than it would be for separate policies, as there is only ever one lump sum paid out by the insurance company.*
Family Income Benefit – These policies work in a similar way to ordinary life cover, but instead of a lump sum, the policy pays out a regular income if you die.
How it works – A typical policy might be taken out by the parents of young children, so that if one parent were to die during the term of the policy, then an income would be paid out for a predetermined period of time. So, if you had a 20-year policy and were to die five years into it, then the policy would pay out a regular income for the remaining 15 years.
What you need to know – Family income benefit insurance is a simple way to provide your family with an ongoing income rather than a lump sum if you were to die. Critical illness can
also be added that would provide a pay out if one of the parents were to be diagnosed with a serious illness.*
Accident, Sickness and Unemployment – This policy provides cover so that if you are
unable to work because you’re injured or sick, or through no fault of your own, you have lost your job.
How it works – In the event of a claim, you will receive a pre-determined percentage of your monthly income, usually for a period of up to 12 months. Payments are made after a waiting period of at least a month. If you choose a longer waiting period, your premiums are likely to be lower.
What you need to know – Accident, sickness and unemployment cover differs from mortgage payment protection which is designed specifically to cover your repayments on a specific debt such as your mortgage. It differs from income protection insurance in that it includes unemployment cover.*
Choosing the right policy or combination of policies to provide the right level of protection you need can be a daunting task if you try to do it on your own. Your adviser will be able to review your personal circumstances and recommend the type of insurance you need, giving you and your family the reassurance and peace of mind that protection insurance can bring.
* Premiums must be maintained for cover to remain in force.
*Protection plans with no investment link 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. The definitions vary between product provider and will be described in the Key Features and Policy document if you go ahead with a plan.