Protecting your family from financial difficulties isn’t just about having savings and investments to provide for the long term. It’s also about ensuring your loved ones are provided for should the worst happen. Here, we explore the different types of financial protection. It’s important to seek advice from an adviser because your options are unlikely to be clear cut. They can help you work out the right cover for your personal circumstances.
Life insurance pays out a lump sum on death which could be used to pay off the mortgage and, ideally, provide a cash buffer. As with any insurance policy, you may have to go through an underwriting process, and the cost of the cover will depend on your age and health.
If you have children or an outstanding mortgage you should consider a life insurance policy. There are several different types of policy to choose from.
Whole of life insurance: This is the most expensive type of cover, providing a guaranteed lump sum on death and, as its name suggests, remaining in force for your entire lifetime. It’s often used for inheritance tax (IHT) planning. If you set up your policy in a trust, it should stay outside your estate for IHT purposes.
Level term insurance: You choose the amount of cover needed, and how long the policy will run for. Typically, this is until the children are grown up, and you have repaid the mortgage. If you die before the end of the term, the policy will pay out.
Decreasing term insurance: This insures you for a fixed period, such as ten years, but the sum assured reduces over the length of the policy. This is more likely to be taken out to run alongside a repayment mortgage.
It can be financially devastating if you are unable to work for a long period because of an accident or illness. Income protection is designed to provide you with a tax-free income if you are unable to work in these circumstances.
You can opt for this income to kick in after a certain period, such as three, six or 12 months. The longer the deferred period, the lower your premiums will be. When you need the income to start will depend on any cover provided by your employer, and your level of savings.
Check the terms carefully so you understand how the policy works, and when payments would begin. How much you pay for cover will depend on what level you choose, your age, employment, and any health conditions.
Income protection can be particularly valuable for the self-employed who do not have any cover through an employer. If you are employed, you are entitled to 28 weeks of statutory sick pay, but you might find cover is extended beyond that. Anyone who wants to protect themselves against loss of income over the longer term should consider this cover.
Types of cover: You can choose from short-term and long-term cover. Short-term cover could pay an income over one to two years, until you are able to return to work, whereas long-term cover might run until retirement, or when the policy ends, whichever is sooner.
Critical illness cover pays out a lump sum on diagnosis of one of the critical illnesses covered by the plan – typically, policies cover core conditions such as heart attack, stroke and cancer. The lump sum could be used to pay off the mortgage and other debts, cover outgoings such as school fees, or to adapt living arrangements to your new circumstances.
It’s important to remember that critical illness policies only pay out for certain conditions, which will depend on the particular policy. Some policies offer guaranteed premiums, which stay the same throughout the policy term, whereas others have reviewable premiums which can increase over time.
You might want to consider critical illness cover if you don’t have enough savings to cover you if you were to become seriously ill, or you don’t have an employee benefits package.
Family income benefit is similar to level term insurance in that it covers you for a set period of time. However, instead of paying out a single lump sum, it provides a regular, tax-free income from when you die until the end of the policy. For example, if you take out a 20-year family income benefit policy and pass away after ten years, it will pay out for a further ten years.
This cover is suited to those who want to provide their surviving partner with an income for a set period rather than a lump sum payout. It’s considered a relatively inexpensive form of life cover, providing a regular, tax-free sum if the insured dies.
For more information, please contact: rosie.graham@brewin.co.uk
