Today’s post is all about making sure you and your family are taken care of financially when disaster strikes, and the different types of human insurance that are available and should be considered. Not always a pleasant topic for many, but the one thing that pains me the most about working with clients is their short-sightedness when it comes to insuring themselves against life’s nasty surprises. We are so good at insuring our Golden Eggs (cars, homes, gadgets, boilers, businesses) but fail to insure the Golden Goose (that’s YOU, in case you didn’t cotton on!) that lays all these eggs. Now I know some of you will rightly point out that some of these eggs are insured because it is a legal requirement, but the statistics show an overwhelming gap in the UK when it comes to protection. Less than a third of UK households have life insurance in place. It’s quite alarming that so many households don’t have the basic cover in place to make sure that their families will survive in the event of the main breadwinner’s early death.
You’ll find me banging the drum for protection a lot as I am such a strong believer in these products and the huge impact that they can have on a family’s life. I’ve seen first-hand the massive difference a pay-out can have when the main breadwinner passes away, or when a partner is diagnosed with cancer. As I have said repeatedly, having adequate protection in place is laying the foundation for a strong financial plan to help create wealth – without it you are building a house on sand.
So let’s look at the main areas for you and your family and see which ones could be applicable and what they each do. I’m going to cover off Life Cover, Critical Illness Cover and Income Protection. I’ll take a look at what they each do, who might benefit from taking them, and how they are set up. This will be a high-level summary to keep the blog short. I suggest you download the audiobook “How to be Wealth and Financially Wise” and listen to Chapter 4 for a more in-depth look at the topic.
What does it do?
Pays out a lumps sum, in the event of death. Usually this is tax free if set up correctly using a trust. A trust is great for ensuring a quick pay-out, avoiding potential Inheritance Tax issues and making sure your wishes are carried out.
There are two types of Life Insurance.
Term Insurance – Cover your life for a fixed period, usually linked to a significant event. For example, until your retirement age or your children no longer being financially dependent (I know many of you are thinking that will never happen ☺).
Cover can either:
Decrease – in order to match a reducing debt, eg. Mortgage,
Stay Level throughout the term, or Increase in line with inflation.
A really practical variant of the Term Life Insurance above, is what’s known as Family Income Benefit. Think of it as an Income on Death policy. So instead of a lump sum being paid out to your family, they would instead receive a monthly income for the rest of the term.
For example: John sets up a Family Income Benefit plan for a term until his retirement age of 65, with a monthly benefit amount £3,000. At age 40, he passes away, the plan starts to pay his family £3,000 per month for the remaining 25 years.
A fantastic product and great at ensuring that the family receives a steady monthly income. Lump sums can be daunting for many families and the receipt of a hefty amount in your bank account can often lead to other stressful issues on how to handle a large sum.
Whole of Life Insurance – As it suggests there is no end point with this type of cover, it covers you until you drop. It will be far more expensive than Term Insurance due to the fact that the pay-out is almost certain as long as you hold the policy till you pass away. It’s a really useful policy for Inheritance Tax planning, providing benefits for funeral costs, and providing legacy payments.
Who Needs It?
- Essential for anyone who has debts that would need clearing if they were to pass away.
- Those with financial dependents (partner/kids/elderly parents).
- If you are single and have no debts, then life cover is not really something that needs to be considered. Focus on Critical Illness and Income Protection instead.
Critical Illness Cover
What does it do?
Pays out a tax-free lump sum if you a diagnosed with one of the critical illnesses specified by the provider. You would usually need to survive 14 days from being diagnosed in order to receive the pay-out. Critical Illness is far more expensive than Life Cover as the chance of claiming is way higher. Just think of the number of people you know that have died naturally by the age of 60 compared with those that have suffered from cancer, heart attack or stroke.
The number of conditions covered under a plan can exceed 60 in some plans, with partial payments available for less severe illnesses. Cover for children’s Critical Illness is included as standard on many plans, or for a small extra fee.
It can become a bit of a minefield, and even as a professional in this space, I struggle to keep up with the changes that are made to conditions and definitions. Each provider may have a slightly different definition for the same condition, but these are becoming more standardised of late. The number of conditions should not be a guide for how good a plan is, as many play a numbers game so they can claim to cover the most illnesses.
Critical Illness can be taken as a stand-alone product or can be added to life cover. If you took the second option it could be formed in two ways:
- Life and Critical Illness – this would pay out on each event.
- Life or Critical Illness – only pays out once, on the first event. The policy then stops.
Who Needs It?
Anyone that would suffer financially if they had a serious illness. I think that pretty much includes most of the planet, unless you are Bill Gates or the incredibly wealthy, which you may turn out to be one day. Until then you might want to consider having some Critical Illness Cover in place for the following:
Clearing debts – I don’t imagine many of us want to be fighting cancer whilst still paying the mortgage. A lump sum pay-out could help to clear your mortgage, or potentially reduce the amount you owe if you can afford to cover the full mortgage. If the premiums of Critical Illness are too expensive, consider covering 3-5 years’ worth of expenditure. It will give you some breathing space whilst fighting and recovering from the illness. As I always say, something is better than nothing!
Lifestyle changes – You may need to make adaptations around the home as a result of a Critical Illness or require extra assistance.
Private Treatment – Sometimes getting the right treatment might not be possible on the NHS. Having the money available makes the decision to go private or abroad for treatment far easier.
What does it do?
Pays out a regular, tax-free income if you are unable to work due to an accident or sickness. The amount of income covered is usually limited to a maximum of 65% gross salary and the term of the plan set to your retirement age. Premiums will be higher for occupations that carry more risk.
The beauty of the plan is that it can pay out multiple times over the term, so you are covered for the whole of your working life. It could be that you have a career-ending injury which means you are unable to work ever again, in which case the income pays out until your chosen retirement age. In my view that is a MASSIVE benefit, as most of my clients could not cope with a loss of income for more than a few months, let alone their entire working life.
Plans are setup with a deferred period – this is the waiting time before the policy will pay out when you make a claim. It can range from 1 week to 24 months and depends on how long you can survive without an income, with longer periods resulting in lower premiums due to reduced risk. For example, an individual with sick pay from their employer of 3 months, coupled with a healthy emergency fund might require a 6-month deferred period on their plan. This would be cheaper than a plan with only 3-month deferred period.
Who Needs it?
I’m a firm believer in Income protection and it is so vital for the journey of wealth creation. Most of us will build wealth from our incomes, and making sure that tap never turns off is priceless, so get the MAXIMUM cover possible.
A long article I know, and still only a very high-level overview of the areas I feel are most important. Hopefully it will nudge you into taking some action if you haven’t already. Or perhaps it’s time to review your cover to ensure it’s suitable. I understand it’s a heavy topic and a little confusing but make sure you have something in place as that’s better than nothing.
If you are young and healthy the cost will be far less than a middle-aged smoker, or someone who has a pre-existing medical condition. Blood pressure and cholesterol, however minor, can still affect the premiums considerably.
On a personal note, I suffer from a chronic condition diagnosed shortly after finishing university. This means I can’t get the full Income Protection and Critical Illness due to the medication I am on, even though this was not through any fault of mine. The cover I do have in place is limited, however, and not what I would ideally like to have. It may change in the future if my symptoms improve, but even then, I will be rated highly and it might be unaffordable.
I reckon that’s enough information to get you started, but like all aspects of financial planning, taking advice can be extremely useful.
Cover will cease on insurance products if premium payments are not maintained.
This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.