Financial protection for you and your family.
Introduction
Public surveys show
that what matters most to people is their family. When it comes
to the crunch, it’s family we first think of, family we worry
about and family that gives us most happiness. The desire to
shelter those nearest to us is fundamental.
The best way to
ensure financial protection is to be a long-lived high earner or
by inheriting or winning a large cash sum. But apart from eating
up our greens and not going hang-gliding there is not a huge
amount we can do to avoid an untimely death.
Even if we cannot
greatly influence the cards that nature dealt us at birth – our
genes – we can at least provide for those we leave behind.
This is where life
assurance and other protection policies come in. The
policyholder pays a regular or single premium and in the event
of the insured’s death, his or her family gets a cash amount,
generally many times the amount paid in premiums.
Because life
assurance has been around so long, and because everyone should
have some level of financial protection, more than 100 companies
provide life assurance and protection policies. This makes for a
competitive market which can only benefit consumers.
However, there are
also many refinements on basic life cover, which provides a
guaranteed death benefit if a claim occurs during the period of
insurance. Life assurance can be set up for a specified period
of time (term assurance) or for the whole of the insured’s life
(whole of life assurance). There are many other protection
policies designed to protect the insured and his or her family
against other life events, such as illness, accident,
disablement, redundancy and long-term unemployment.
Spoilt for choice.
The abundance of
choice may seem like a mixed blessing. With so many options,
making a decision could seem overwhelming. For a straightforward
life assurance policy, you can try one of the web-based
financial advice services that claims to come up with the best
deal. You can find the services through an Internet search. You
fill in details, such as age, medical details, gender,
occupation, smoker/non-smoker and how much you want to insure
your life for or somebody elses (if you have what is known as
‘insurable interest’ on their life). Hit ‘Enter’ and you know
how much your premiums will be.
However, buying life
assurance is not to be done without serious reflection. Lots of
factors need to be taken into consideration such as – what is
the right level of cover and for how long should it last? It’s
really worthwhile to discuss these questions with an Independent
Financial Adviser (IFA).
An IFA might well
suggest, for instance, that instead of going for just a
straightforward life assurance policy, you also take out a
different type of protection product.
The other forms of
financial protection
Simply having life
assurance may not be enough. What, for instance, if you contract
a near fatal disease or illness? Cancer, stroke and heart
disease are the greatest risks. You may not be able to work and
so lose your income; but you are still alive so your life
assurance does not pay out. And to compound the problem, you may
need expensive nursing care or to adapt your home, or even move
house.
Except for the very
elderly, it is more likely that an individual will be diagnosed
as having a critical illness than that they will die in the
short term. As a result a critical illness policy is more
expensive than comparable life assurance. It is the type of
protection policy you hope you never need to claim on, but if
you do, the benefits can be a financial lifesaver.
Permanent health
insurance,
known as income protection makes up income lost through illness,
accident or disability. Rates vary according to the dangers
associated with one’s job, age, state of health and gender but
PHI is thought to be of particular value to the self employed
who do not have an employer to continue paying their salary if
they are unable to work.
Critical illness
insurance,
a critical illness policy pays out a lump sum if you are
diagnosed with one of a number of specified 'critical' illnesses
during the term of the policy. Many life insurance companies
offer policies that cover you for both death and critical
illness and will pay out the guaranteed benefit on the first
event to happen.
Loan protection
insurance
covers the policyholder if they lose their income, through
illness or accident. This type of policy will help with some or
all loan repayments.
Mortgage payment
protection insurance
is set up with a term specifically matching your mortgage term –
say 25 years. The policyholder is covered for the term for the
amount of their mortgage repayments as long as they keep on
paying the premiums.
You need to read the
small print before buying any protection policy as there will be
exclusions, such as self inflicted injury or dangerous sports.
An IFA can point out and explain the small print of each type of
policy.
There is a further
choice of protection policies that can be used to protect your
income and the financial cost of any loan, mortgage or other
financial commitment you may have.
Accident Sickness
and Unemployment (ASU)
can be taken out for
any purpose to protect your income and to give you peace of
mind. The benefits normally only pay for one year on a valid
claim if you have an accident, are ill or become unemployed.
Most of these
protection policies operate a 'deferred period' which is the
period from when an event happens, that you can claim for, to
when the policy starts paying out. You need to check the policy
wordings carefully to ensure the policy matches your financial
protection needs.
Private medical
insurance
can cover you for private medical treatment and you can choose
to add on extra cover, such as dental cover. You may select the
hospitals that you would want to be treated in close to home. As
always the more benefits and the more comprehensive policy you
select the more it will cost.
Long-term care
insurance
is designed to cover you against the cost of nursing-home care
in your old age and you can pay for it as a lump sum or in
regular payments.
Life assurance
add-ons.
Rather than
assessing the need for one or more of the range of policies,
some of which overlap, you can add extras to life assurance
policies. This may prove more economical – again an IFA can help
you to work out the maths. Extras include critical illness cover
and “waiver of premium”. This means that if you cannot do your
usual job because of illness or injury, the insurance provider
pays the premiums to keep up your benefits until you recover.
You may already have some life insurance or protection offered
by your employer, so it is worth checking.
Life assurance as a
form of savings
A variation is to
use life insurance as a form of saving. You decide for how long
you want to save and this often takes you to when your interest
only mortgage needs to be repaid. At the end of the term you
should receive a cash sum based on investment growth.
At the same time, if
you die before the end of the term, the policy will pay out a
guaranteed death benefit. These plans, known as endowments, can
be issued on a with-profits or unit-linked basis.
With profits or unit
linked?
If you invest in a
with profits life assurance policy your premiums are pooled in a
fund that has a wide spread of investments such as shares,
bonds, property, gilts and cash. You may receive regular bonuses
and a final bonus. Once they are added regular bonuses cannot be
taken away. The final or terminal bonus, which you could
possibly receive at the end of the term, depends on the health
of the fund and there is an element of doubt as to how much you
will get. That risk has been highlighted by endowments taken out
to repay mortgages. Millions of homeowners who expected their
endowments to cover their outstanding mortgage have been
disappointed.
This misfortune
resulted from investment growth assumptions being too high when
the endowments were taken out. As a result, endowment backed
mortgages are not as popular as they were previously.
If you already have
an endowment or wish to invest in one, an IFA will be able to
advice you on the financial strength of the provider (which is
important) and whether the endowment is appropriate for your
circumstances.
Another choice –
life assurance bonds.
If you have ready
cash, for instance from an inheritance, you can use it to invest
in life assurance bonds. Single-premium life assurance bonds
vary and can be unit linked or with profits. So, again an IFA
will be able to help you pick the funds that are best placed to
benefit you.
If you choose a
unit-linked life assurance policy, you can choose what you
want to invest in. The choice of funds is diverse – from cash
funds to emerging markets. The price of units in unit-linked
funds will go down as well as up so you really need to talk to
an IFA who understands your investment risk tolerance.
Particularly for
life assurance bonds and endowments there is no guarantee that
you will get your money back when you cash in and it is
important to remember that past performance is no indication of
future performance.
Tax
Generally,
whole-of-life assurance policies and term assurance policies are
free of personal tax if you continue to pay the premiums for the
stated period. It’s a great advantage. But you must check that
your policy remains free of personal tax if you wish to change
it. For instance, if you surrender early (except in the event of
death) you may be liable for tax.
Life assurance
products can be tax efficient in other ways, for example, if a
single premium life assurance bond is put in trust for the
future benefit of nominated beneficiaries, in the event of a
claim the benefits are outside of the deceased’s estate and
therefore free of inheritance tax. This is of particular use to
anyone with an estate over the Inheritance Tax threshold of
£300,000 (2007/2008) who wants his or her heirs to mitigate
their inheritance tax liability.
What to watch out
for
The personal finance
pages of newspapers are full of warnings such as ‘Think before
you act…such and such is a long-term investment.’ Such guidance
applies to life insurance and other protection products. For
endowments and life assurance bonds there is no guarantee that
you will get your money back. For other protection policies
there may not be a cash value at anytime.
That’s why it’s so
important to plan ahead, receive unbiased advice and consider
carefully all your financial options.
“Cooling off” period
If you buy life
insurance when you have received advice then change your mind
and would like to pull out of the purchase you have two weeks,
or longer, to do so without loss. This cooling-off period is
your statutory right. It is part of a raft of consumer
protection laws.
How do you make the
right choices?
It’s clear that
choosing the right mix of financial protection is not simple,
particularly when there are so many providers and products.
Among the decisions you need to make are:
• how much cover
should I have?
• for a specified
term or for the whole of the insured’s life?
• which protection
policies should I have?
• which fund is most
suitable?
• which provider is
the most appropriate?
• do I need critical
illness cover and/or income protection?
Advice from an IFA
should help with all these questions. Even the first question –
how much cover should I have? – is not that easy to calculate.
Factors such as the age of children, who is the breadwinner of
the family, how long the benefits need to be paid for and what
level of cover are relevant. IFAs are used to doing the sums,
they have sat exams that test that they do it properly. You can
also expect an IFA to tell you about the relative strengths of a
provider and how quickly they deal with claims. They will also
help you with your application form which, once complete, will
be sent to an underwriter at a product provider who will set
your premiums.
An IFA can deal with
over 100 life assurance and protection providers and will
recommend the most suitable for you.
