Personal insurance: what you need and when you need it
As you pop open the champagne to celebrate the birth of your child or the start of your retirement, insurance is unlikely to be front of mind. However, life-changing events are typically the time when you need protection more than ever.
The number of products on the market can be overwhelming, leaving some people confused about what cover they actually need – and what they don’t.
We asked protection experts to unravel the personal insurance minefield.
‘I’m buying a house with my partner’
If you’re taking the plunge and buying a property with your partner, there are two main priorities from an insurance point of view: making sure the mortgage debt is cleared in the event one of you dies and being able to continue mortgage payments if either of you can’t work due to long-term illness.
The debt only needs to be paid once so a joint life insurance policy tailored to the level of the mortgage and decreasing in line with the debt will be needed for the life cover. “This will be surprisingly cheap,” says Peter Chadborn, director and adviser at Plan Money.
Another option is to buy two single life plans. With a joint policy, you and a partner are covered by the same plan. If you take out two single policies, they are completely separate plans meaning you can get double the cover. You can also be insured for different amounts.
Roy McLoughlin of Master Adviser says purchasing two separate policies has its benefits: “It’s very difficult to break up a joint life plan if you and your partner separate. In these circumstances a lot of people just end up cancelling it.”
Income protection is also a good idea for homebuyers in order to protect mortgage repayments. If your employer provides sick pay, this might not be a requirement. However, if they don’t, the level of cover should be for at least your proportion of the mortgage payment and run for at least the term of the mortgage, Chadborn suggests.
Houseperson cover could also be worth considering. This is a type of income protection that covers housewives, househusbands, people who have been unemployed for at least 3 months and students.
‘I’m getting married’
Unless you are buying a place together for the first time – in which case the points above are all relevant – your financial dependence upon each other is unlikely to have changed.
However, if budget permits, Chadborn suggests considering critical illness cover. This insurance provides a ‘financial cushion’ should you be diagnosed with a serious illness which may not prevent you from returning to work. You may not die from it but you may want to adjust your lifestyle or not have to work so hard. The lump sum pay out from a critical illness policy will effectively buy you lifestyle choices.
‘I’ve just had a child’
Having a child is the time in your life when you need the most insurance but you are most likely to be able to afford the least. Your children rely on you for their financial well-being and, on the basis that one parent will not be working, for some time at least, there’s never a greater time to make sure you have comprehensive life insurance in place.
Chadborn says parents should take out life cover so that they can produce an income in the event the worst happens until the child becomes financially independent.
“Even if only one partner is working, cover is needed on both because this will enable choices to be made about whether the remaining partner stays at home with the kids or goes to work and pays for childcare,” he says.
Thanks to the rise in university tuition fees, it’s also worth considering that your children may not become financially ‘independent’ until later in life.
An employer may provide death in service life cover but this is not likely to be sufficient, Chadborn says. “You should consider critical illness cover if you haven’t already done so. You should also consider topping up your income protection cover beyond just covering the mortgage.”
Some people may also want to cover private school fees. Products like the School Fees Trust Scheme pay for the continued education of a child at a fee paying school up to the age of 18 in the event of the death of an insured parent or if they become terminally ill or suffer a critical illness such as a heart attack or cancer.
In contrast to having kids, this is a time when you need the least but can afford insurance the most. If you have no savings you might want to consider a life insurance funeral plan. Alternatively, life insurance can be arranged to pay out, in trust, to your estate beneficiaries to offset against inheritance tax liabilities.
You may also want to consider private medical insurance (PMI) at this point, especially if you have little or no savings. PMI may have been a benefit you enjoyed while working so losing it may have a real effect on your life. Remember though that chronic illnesses such as diabetes and cancer aren’t usually covered. It’s also not cheap.
A typical family premium (two adults in their 40s and two children under 10) can vary from £700 to £1,650 per year, according to the Money Advice Service. Premiums will rise every year, and with age – so by the time you’re older, and more likely to need hospital treatment, you may not be able to afford it.