The importance of cover for buildings and car insurance is self-evident and most people obtain these as a matter of course.
However, a fundamental and much-neglected area is basic personal and family protection. This is commonly due to a belief that the Government will be far more generous with financial support than tends to be the case in actual instances of personal injury or worse.
It, therefore, makes good financial sense to ensure that partners and/or dependents will not be left with a financial burden in the event of an individual’s death or long-term illness. For single people, this may mean simply covering a mortgage payment during a period of illness. For those with spouse/ partners, it is usually more complex planning along with the protection of children’s education, future income loss or other financial commitments.
People also purchase expensive policies from their provider when they take out a mortgage but fail to review their plans at a later date. Whilst most people are drastically under covered, equally, there is no point in paying more than is needed or paying for something that is surplus to requirements.
When we discuss protection with the client, they are usually placed into different categories.
1. Level, Decreasing and Mortgage Protection.
These are by far the most common types of Protection currently been used. They all pay a tax-free lump sum on death or in some cases terminal illness to an individual or trust as directed by the policyholder.
The level cover is as it reads, the lump sum remains the same for the term of the policy.
The decreasing cover has a reducing lump sum amount over the term of the policy.
The mortgage protection is linked to the amount on the mortgage when the policy is taken out and it can be level or decreasing.
In terms of premiums, the level term will always be the more expensive but offers the greatest level of cover in the lump sum amount.
2. Critical Illness Protection
Critical Illness cover pays a tax-free lump sum directly to an individual should they suffer any of a list of defined medical conditions or surgical procedures, classified as critical illnesses (e.g. cancer, heart attack, stroke), and survive for a named number of days – usually between 14 and 21.
The lump-sum can be used however an individual wish. For example, they could fund private health treatment, make adaptations to their home, take time off to care for a loved one or take a well-deserved holiday once their treatment is finished.
3. Income Protection
Income Protection insurance is designed to provide an individual with a regular replacement income if they are unable to work because of illness or injury. Typically, a policy pays out after they’ve been off work for 6 months (often called a deferred or waiting period) and can pay up to 75% of their salary until they either return to work, die or reach state retirement age, depending on the policy terms and conditions.
The deferred period can be less or greater than 6 months, but this is reflected in the monthly premium amount. The lower the deferred period the higher the premium.
If an individual can return to work, but on a reduced basis which means they earn less, it may continue to pay out a reduced amount that takes the drop in salary into account.