When you’re fit and healthy and feeling secure in your job, it’s hard to imagine anything going wrong. However, serious illnesses, death and other reasons that render you unable to work can always unexpectedly occur. So if anything did go wrong, how would you fare?
If you don’t have insurance in place, these are the types of questions you’d be thinking about:
• Would you still get the level of income you (and your family) are used to?
• Could you still afford to pay your monthly bills, your loans and most importantly your mortgage?
• How would the loss of income affect your family?
Here at Credius, we have access to a variety of options to help you secure you and your family’s financial future.
Throughout this 2-part article, we’ll be providing you with the information you need to make an informed decision about how best to protect you and your loved ones if something does go wrong.
From Life Insurance, to Business Protection and Critical Illness Cover to Income Protection, we’ll guide you through what each cover actually means, how to calculate the levels you’ll need and how you can get the right, all-round protection for you, whilst keeping your premiums down.
We’ll also look at the application process, your obligations to the insurance company and when you need to review your policies.
So whether you’re fit and healthy and feeling secure in your job or you’ve got concerns on the horizon, this guide will help you guide you towards the right decisions to provide you and your family with peace of mind knowing you’ll be financially secure should the future not turn out as expected.
Life Insurance – What you need to know
Life insurance is something many of us would never dream is relevant to them. I mean, it’s not like we’re going to die any time soon is it?
Well – not wanting to state the obvious, but none of us really know when we’re going to die. It could be in 50 years’ time or equally it could be next week (we’re sorry to be the bearer of such gloomy news).
Either way, it’s never nice to think about it but that doesn’t mean we shouldn’t.
Life insurance is a vital part of financial planning for anyone who has dependents. By ‘dependents’, we’re referring to those whose circumstances and material well-being would be affected by your death. So that means your partner, your children or anyone else who is financially reliant on you.
It can make the difference between your loved ones struggling financially and maybe having to move home or them being able to pay the mortgage/rent and maintain a similar standard of living while coming to terms with your death.
So how does life insurance work?
Life insurance comes in a variety of forms. At its simplest, it pays out an agreed amount, either as a lump sum or as a regular income if you die within a specified period, known as the ‘term’. Hence it is often called term insurance and this term can be anything, typically from a minimum of 10 years upwards.
Just like with any insurance, you will need to choose a level of cover. Remember, this is the amount you’re dependents will receive if the unthinkable happens so make sure it will cover all the bills and allow them to live comfortably.
Most policies will have some exclusions. For example, they may not pay out if you die due to drug or alcohol abuse, and you normally have to pay extra to be covered when you take part in risky sports so it’s important to check the small print.
If you have a serious health problem when you take out the policy, your insurance may also exclude any cause of death related to that illness.
One last thing to remember is that life insurance is just that, it’s insurance for your life (or lack of it) and will not cover you for illness or loss of earnings in any other circumstances.
Lowering the cost of your life insurance
The cost of your life insurance, known as the ‘premium’, can depend on a range of factors including your gender, age, existing health conditions, family medical history, your weight and of course your smoking status.
It goes without saying, if you smoke, your premium is going to go up, but it’s worth noting that if during the life of your policy you quit smoking (and remain a non-smoker for over 12 months) you may be able to revisit your policy and have your premium revised. The key message is live a healthy lifestyle and your premiums will be lower.
Generally, applicants who are older will also pay a higher premium so it really pays to take out life insurance at a younger age.
There are three main types of life insurance – level term, decreasing term, and whole-of-life. So what’s the difference?
Well, the first two require you to state a number of years over which your policy will cover you whilst the latter covers you for the duration of your life. Clearly the shorter the term, the cheaper the overall policy will be – however this can be a false economy, because if you chose to take out another policy when your first one ends, you’ll be a good deal older and your policy will be more expensive as you’re deemed “at higher risk of death” (morbid – we know!).
Level term assurance means that if your policy covers you for a £500,000 payout when you buy it, it will still cover you for that amount in 3, 5, 7 or 10 years times, whatever the duration of your policy is.
Decreasing term assurance could bring your premium down significantly. This means the value of cover will decrease in line with your expecting debts during the course of the policy. Perfect if you simply need to make sure there is enough to pay the mortgage off.
Get value for money
If you are a couple, there is another relatively simple measure to greatly improve the value you can get from your life cover.
Couples are often offered joint life insurance policies. This means the policy pays the same sum if either of them dies. However, this is only suitable if both parties need the same level of cover.
What’s more, the price of joint cover is often only slightly cheaper, if at all, than two single life policies with the same sum assured for each. Taking out two separate policies instead of a joint policy means that, if the very worst were to happen and both parties died, any dependents would get twice the pay-out.
Ultimately, the best way to get the most for your money and ensure you have the right cover for your needs is to speak to a financial adviser who will have hundreds of products at his or her fingertips and can direct you towards the right direction.
Critical Illness Cover vs Income Protection – What’s the difference?
Given the world of uncertainty we live in, unexpected events can suddenly happen, rendering us unable to work at any time.
Therefore, deciding how to protect your finances and lifestyle from the risk of sickness or injury should be pretty high on your “to do” list. But with a range of policies out there which protect against loss of income due to illness, how do you know which one is right for you?
The two main policy types are Critical Illness Cover (CIC) and Income Protection and whilst both of these policies are designed to pay out if you fall ill, the criteria you must meet for a pay-out and the manner in which the payout is made varies. Let’s first consider CIC.
CIC provides the insured person with a lump sum payment if they are diagnosed as suffering from one of a range of critical illnesses. The important thing to note here is that it will only pay out for specific illnesses and these will be listed on your policy (normally it’s a list of 40-50).
This list is largely determined by the Association of British Insurers Statement of Best Practice and covers such illnesses as cancer, stroke, heart attack, kidney failure, major organ transplant, multiple sclerosis and coronary artery bypass surgery.
As with life insurance, you determine the level of pay-out you would like to receive if you need to claim and you choose a length of the policy.
Now let’s compare this to Income Protection. Rather than paying a lump sum, this type of policy covers your earnings from the risk of sickness or injury and will pay out a monthly benefit of up to 65 per cent of your gross income.
It is a long-term plan providing protection all the way up until you retire, or when the term of the policy ends, whichever is sooner. In addition, and multiple claims can be made throughout the life of the policy. One of the great advantages of income protection insurance is that it covers you for practically any illness or injury that prevents you from working.
So which one is right for you? Well, it depends on your situation and your needs and believe it or not, many people will opt for both.
Income Protection: Everything you need to know
As we mentioned previously in this article, Income Protection will provide you with a % of your regular monthly income if you are unable to work through critical illness or injury.
Because everybody has different needs and different risk levels, insurers will require some detailed information from you to be able to provide the cover you need and this information will naturally affect the price of your premium. Here are a few things they’re likely to ask.
How long you would like your policy to run for
Typically this is through to retirement but a shorter policy is likely to reduce your premium
How much you would like to be covered for
Insurers are happy to cover you for almost any amount you wish. So if you say you currently have a £200k salary, that’s what they will cover you for. But be warned.
Regardless of how much you are covered for, in the event of a claim you will have to produce documented proof of your income and if it is only, in fact, £20k, regardless of the level of cover you purchased – you will only be paid a % of your real earnings.
Whether you want your cover to rise in line with inflation
This is a great idea, especially if the length of the policy is significant
The waiting period
The waiting period dictates how long after an accident or commencement of illness you would like the policy to kick in and beginning to pay-out. Obviously the longer the waiting period, the lower the premium is likely to be.
All occupations are graded as to the risk they pose to illness, injury and even death and this will have a direct impact on your insurance premium
Your medical history
It’s crucial to give your insurer accurate medical history as in the event of a claim, any hidden conditions will be uncovered through the insurer’s investigations prior to a claim being actioned.
If you have an existing condition, your insurer may still provide cover for an additional premium.
This is very important. Own occupation will pay out if your illness or injury prevents you from being able to carry out your main occupation (even if you could still work in a different role).
The alternative cover is “Any Occupation” which means you will only receive a payment should you not be able to work at all.
Some other important things to consider
IP does not cover you for pregnancy, redundancy or job loss, injury or illness relating to alcohol or drug misuse or pre-existing conditions (unless agreed).
Some insurers, however, will provide cover at an additional premium for redundancy.
Please note regarding redundancy cover:
Any form of redundancy cover is classed as short-term Payment Protection Insurance (PPI). Payment Protection Insurance is optional. There are other providers of Payment Protection Insurance and other products designed to protect you against the loss of income. Please click here for impartial information about insurance.
Income Protection can be a complicated topic and it’s important to really understand your needs before jumping into a lengthy commitment. By contacting Credius, we can provide expert advice and provide you with access to a portfolio of various products.
Income Protection for Company Directors
If you’re a Director of a Limited Company and Income Protection or Life Insurance is provided as a company benefit, you may want to consider the following alternative policy types to protect you and your family financially.
• An Executive Income Protection Policy (equivalent to Income Protection)
• A Relevant Life Policy (equivalent to Life Insurance)
Both of these types of policies are taken out by the company itself to provide financial protection for the key personnel within the organisation.
One of the main differences with these policies and standard life or income protection insurance is that instead of it being your policy and any pay-outs being made to you, the policy is actually owned by the company and any pay-out will be made to the company.
The company is then free to use the funds however it wishes. In the case of Executive Protection, this would typically be paid to the individual in the form of sick pay as a monthly benefit. In the case of Relevant Life policy, a lump sum would be paid out to the family if the worst were to happen.
Critically then, where standard policies would pay-out to an individual tax-free, this payment is made to the company and so any payments made out to the individual from the company would be taxable income so it’s important to take this tax layer into account when choosing a level of cover for those on the policy.
“So what’s the point?” you might think. Well, there are real benefits to choosing these types of policies. Chiefly, instead of your policy premium becoming a taxable benefit on your payslip every month, it becomes an expense to the company that is tax deductible.
This means you pay less tax monthly than with a traditional company benefit and your company can write off the costs of the policy against their profits.
What about dividends?
Obviously, every policy provider is different, but if your dividends do stop in the event that you make a claim, it is commonplace for these to be included in any protection and ultimate pay-out. Insurers will need historical proof of dividends before determining a level and we strongly recommend speaking with your adviser upon taking out the policy to ensure the relevant cover is in place.
Credius provide expert advice and have access to a portfolio of various products to match the most demanding of requirements, contact us today to find out more about the insurance services that’s right for you.
Interested in learning more? Check out part 2 of this article!