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Life insurance: How to blend cover options for full protection now and in the future

Life insurance: How to blend cover options for full protection now and in the future
Your Money
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Your Money

When it comes to life insurance, it isn't an ‘all or nothing’ choice of plan. Cover can be arranged to meet your budget and protection that's best for you and your circumstances.

As the saying goes ‘a man’s home is his castle’. Of course, that quote is slightly outdated and applies to women too but in the UK it is especially relevant as we are a nation of homebuyers.

According to recent statistics from Which? more than £433bn of mortgage debt is not protected by a simple and cost-effective life insurance policy. While life insurance isn’t a legal requirement, it is generally prudent to consider when making the biggest purchase of a person’s life.

As an adviser, I feel many people fear the costs involved with insurance plans or think they can’t get cover because of previous ill health or a family history of ill health which is rarely the case.

A lot of clients also believe it is ‘all or nothing’ when it comes to insurance plans, but that is not the case, and most plans can be arranged to meet the client’s budget and cover needs most relevant to them.

Many people also get confused over what insurance policies actually cover, especially if going to comparison websites to arrange by themselves. I have spoken to many a client where I have had to change their policies in-line with their needs.

The most common confusion is around critical illness cover and income protection. So, for clarity, here’s a rundown of the policies available on the market:

Life insurance

Life insurance provides a lump sum payment if the insured dies or is diagnosed with a terminal illness expecting to lead to death within 12 months.

Typically, it is used to repay a debt, such as your mortgage or provide a lump sum for family members if required.

Critical illness

This provides a lump sum payment if the insured is diagnosed with a pre-defined illness. Illnesses will be listed in the insurers policy documents and will confirm the stage and grade of diagnosis before payment would be made.

The illnesses vary from insurer to insurer but typically include cancer, heart attack, stroke, and many other serious illnesses.

The cover available varies wildly and therefore it is important to get advice on the best plan.

Income protection

This policy is designed to pay you up to 65% of your gross monthly earnings tax-free from when your work sick pay ends until you return to work healthy or potentially retire.

There are no restrictions on the illness or accident that prevents you from working as long as it is not specifically excluded from the policy.

Although you can go to comparison websites to get a quote for this plan, they actually quote for accident, sickness and unemployment cover which is not the same product and typically pays for a short-period of time only.

Therefore, it is imperative to get advice to ensure the policy meets needs.

Family income benefit

This policy will pay a monthly benefit if the insured dies or is diagnosed with a terminal illness expecting to lead to death within 12 months.  You can add critical illness cover to this policy, but most do not. It is used predominantly to provide for financial dependants.

How I would, as an adviser, make a recommendation to meet the needs of a client would depend entirely on the clients’ individual circumstances.

Everyone’s circumstances are different, but if I take a typical family where they have a mortgage, two children and both are working with one being the main wage earner I can give you an idea of how we would look to cover the family assuming it was affordable for them.

From an advice perspective we would firstly look to make sure that the roof over the family’s head is secure should either party to the mortgage die prematurely as a parent dying is traumatic enough without having to move home as well.

Then we would look to see if the surviving adult can afford to cover the household bills and children’s expenses on their own income. If they cannot we would also look to include a family income benefit plan to ensure that the surviving family member received some monthly income to support them until the children had flown the nest.

Following on from that we would discuss how they can support themselves if one of them went long-term sick. If they’d struggle, we would discuss setting up an income protection plan accordingly.

The final consideration would be a diagnosis of a critical illness. A cancer diagnosis generally costs you £570 per month more than your usual outgoings according to MacMillan.

At a time when you are most vulnerable are you going to have that extra money? If not, we can ensure an injection of cash to help with that via a critical illness plan.

Now obviously, all of this comes at a cost, but a good protection specialist will guide you through the options, ascertain your individual needs and budget and advise accordingly.

Of course, the real test of these policies are at claim stage. As a homeowner in the UK, the help towards mortgage payments if you are long-term sick is pitiful.

Income protection provides you the opportunity to remain in your property worry-free about finances at a time when you should be concentrating on recovering.

Life insurance will ensure that the surviving family will not have to concern themselves with repossession at an already devastating time.

Family income benefit will help with those bills once the mortgage has been repaid and maintain your family’s standard of living.

Critical illness will either help with the additional costs of the diagnosis, make alterations to property/help with the cost of moving home if required, or pay for that once in a lifetime trip.

Samm Walker is a protection adviser at John Charcol mortgage brokers