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BLOG: Why you need protection insurance

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Written by: Matt Coulson
05/03/2021
The past 12 months have presented various challenges for many. Households have had to face sickness, unemployment and a loss of job security which has led to financial instability.

It’s therefore unsurprising that there has been an increased interest in protection insurance, which can provide some cover in the form of financial help, in the event of long-term sickness, an inability to work and death.

What is protection insurance?

Protection insurance is a specialist type of cover and comes in three forms: life insurance, critical illness, and income protection.

Each provide cover for different risks.

Life insurance pays out a lump sum on your death providing financial support to your family and those in your household who are dependent on your income.

If you are the breadwinner and you have children or dependent adults who rely on you financially, then life insurance is definitely one to consider.

However, some insurers have now started adding exclusions for pandemics. That’s not to say you won’t find cover; it just may take more time and research to find the right policy for you.

However, if you had a life insurance policy in place before the outbreak of Covid-19, and you contracted the virus and died, it’s likely that your policy would pay out on your death.

Often, when applying for a mortgage, you will be offered life insurance so that in the event of your death, some, or all, of your mortgage will be paid off. This means that your dependents can remain in their home safe in the knowledge your life insurance will cover some of the outstanding debt.

You may also receive life insurance cover from your employer as an employee benefit – so it’s worth checking this.

Critical illness pays out a single lump sum if you’re diagnosed with a condition or illness that is listed in your policy such as some cancers, heart-related conditions, lung disease and strokes. Some policies also include cover for your children.

However, it’s unlikely that Covid-19 will be included in the list of illnesses. Critical illness is useful if you don’t have enough savings or employer support should you need to take time off work due to illness.

Income protection provides cover if you’re unable to work due to illness or injury. Unlike critical illness, which pays out a lump sum on diagnosis of a listed condition, income protection provides monthly payments to the insured in the event that they can’t work due to injury or illness.

A key distinction is that income protection includes more common mental health conditions such as stress in the definition of ‘illness’.

The key principle of income protection, is that it replaces 65% of your pre-tax salary for the duration of your absence from work.

With sickness benefits and statutory sick pay generally being inadequate, income protection provides a long term, regular payment to cover your daily living costs.

The value of your monthly benefit (pay out) is directly linked to your premium, so generally the more you pay, the greater the monthly benefit.

Any pay outs are subject to a waiting period, which means the time between when you stop working and you start receiving your benefit. This can be as little as one week to 52 weeks.

If your company provides sick pay over a number of weeks, you may wish to choose a waiting period which enables you to receive your income protection benefit once your sick pay comes to an end.

Income protection provides an important safety net for self-employed people who don’t have access to an employer’s sick pay scheme.

Top tips for choosing protection insurance

  • Use a good adviser: Protection insurance is a specialist insurance which takes into consideration many risks and factors including lifestyle choices (such as smoking, hobbies, and diet), existing medical conditions, employment status and family circumstances.
  • Therefore, seeking guidance from a specialist protection adviser is highly recommended.
  • Steer clear of DIY online policies: Whilst there are cheaper options available from comparison sites, they are generally less comprehensive than advised policies, which provide more cover at a similar or cheaper price.
  • Don’t fall for ‘cheaper’ cover: There are cheaper policies available but be aware that they will often be very basic with additional risks offered as paid for add-ons.

Matt Coulson is director and principal at Heron Financial

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